Daily Outlook

The Australian Dollar has rallied over 2 cents over the last 48 hours, currently trading at its highest level since July 2015. The US dollar fell against major pairs experiencing significant weakness as dovish commentary from the FOMC left the market cautious. The Federal Reserve left rates unchanged at 0.25% – 0.50% citing concerns over the global economic outlook. On the domestic front, Australian unemployment figures beat expectations by 0.2%, contributing to bullish AUD sentiment.

Despite China uncertainty, commodities continue to strength, adding fuel to the rising AUDUSD pair. The market disregarded underperforming industrial production data out of China late last week, as it proved not enough to calm the AUD rally. Weaker industrial data highlighted the heavy excess capacity problem currently threatening China’s growth. Although the Australian dollar continued to post gains, trading at 0.7658 at time of writing, some analysts predict the dollar has been overbought.

Although some analysts forecast AUD highs of 0.78 and 0.79, We believe the commodities rally is unsustainable and the market has overvalued the strength in recent domestic data. Catalysts for retracement in the pair would include softening commodity prices, strengthening US data, and/or central bank easing.  Weak Chinese performance could drive commodity prices lower while improvements in US data would support further tightening of monetary policy by the Fed. Local FX strength could also lead central bankers to consider measures of weakening their domestic currency.