Australian Dollar Outlook: Tied to Biden Stimulus Bets, S&P 500, US Dollar, Treasuries

Australian Dollar Fundamental Forecast: Neutral

• Australian Dollar strength may cool ahead on stimulus uncertainty
• Rising Treasury yields putting on breaks for US Dollar weakness
• Key event risk to watch: Chinese 4Q GDP, Australian jobs report

The growth-linked Australian Dollar spent most of this past week trading in limbo, a marked shift in pace from persistent gains since late October. Aussie crosses like AUD/USD, AUD/JPY, AUD/CAD and AUD/CHF tend to move very closely with broader risk appetite. This dynamic has been underpinned since central banks dramatically eased policy last year to support a global economy ravaged by the coronavirus.

The story has been of an impressive recovery in equities, and now something else is brewing that may conflict with risk appetite. That is rising Treasury yields, specifically on the longer-dated front. This past week, hopes of fiscal stimulus from the world’s largest economy sent them rallying as investors bet on a recovery in growth in the medium term. This may work in the US Dollar’s favor, cooling Aussie gains.

Of course, higher interest rates are still some way off, a point noted by Fed Chair Jerome Powell this past week. This tone may be underscored ahead by central banks from developed nations: the ECB, BoC and BoJ. According to the DaliyFX Economic Calendar, main benchmark lending rates are expected to remain unchanged next week.

Arguably, the most pressing story to watch for ahead that extends from this past week is of US fiscal stimulus. Joe Biden, who takes office as the 46th president of the United States on Wednesday, unveiled a USD 1.9 trillion package. It includes a direct payment of 1.4k, on top of the 600 already passed from the bipartisan bill, increasing a weekly unemployment supplement to 400 from 300 and more.

With such a razor thin majority for Democrats in the Senate session to come, the extent to which Biden will be able to pass his plan without Republican support is unclear. A simple majority means that Democrats may resort to budget reconciliation, limiting measures to revenue and spending. Pushback from across the aisle could cool some of the gains in equities, posing a risk to the Aussie.

The currency may benefit from upbeat Chinese fourth-quarter GDP however, considering the latter’s rosy trade figures reported last week. China is Australia’s largest trading partner, with positive data from the former potentially resulting in economic spillovers for the latter. Given the dovish RBA, Australia’s jobs report may do little to alter the central bank’s near-term stance, aside from an unexpectedly dismal outcome.

Australian Dollar, US Dollar, Wall Street, Treasury Yields

Chart Created Using TradingView

--- Written by Daniel Dubrovsky, Currency Analyst for DailyFX.com

To contact Daniel, use the comments section below or ddubrovskyFX on Twitter