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Australian Dollar Performance: A Closer Look

Overview

The Australian dollar has been performing well, reaching a six-month high and scaling a fresh 33-year peak against the yen. This upward trend is attributed to soft U.S. economic data, which has boosted hopes of a September rate cut, supporting bonds and leading to a surge in demand for carry trades.

Market Analysis

The Australian dollar firmed 0.2% to $0.6718, having gained 0.6% overnight to as far as $0.6733, its highest level in six months. The currency also broke through the top-end of the recent trading range of $0.6714, supported by market wagers that the next move in local rates could be higher. The kiwi dollar, on the other hand, edged 0.1% higher to $0.6108, having climbed 0.4% overnight to as far as $0.6129, and bounced off its 200-day moving average at $0.6071.

Economic Data

Overnight data showed that the U.S. services sector contracted last month, with employment notably weak ahead of the June payrolls report due on Friday. Economists forecast an increase of 190,000 jobs in June after a jump of 272,000 in May. This data has led to a significant increase in the probability of a September rate cut from the U.S. Federal Reserve, now standing at 76%, up from 65%.

Analyst Insights

Tony Sycamore, an analyst at IG, noted that the Australian dollar needs to see a sustained break above resistance at 0.6710/20, a development that is closer to achieving and likely hinges on the outcome of tomorrow night’s non-farm payrolls data.

Impact on Interest Rates

Markets have lifted the probability of a September rate cut from the U.S. Federal Reserve to 76%, from 65%. Back in Australia, investors have pared back the risk of an interest rate hike in August to 20% from about 30% a day ago. This contrast between the two countries’ interest rate outlooks has contributed to the Australian dollar’s strength.

Carry Trades and Bond Market

The Australian dollar has also benefited from robust demand from carry trades, where traders borrow a currency with low interest rates to invest in a currency with higher yields. Australian bonds rallied in tandem with U.S. Treasuries, but soon lost steam and ran into some selling pressures. Ten-year government bond futures gained as much as 8 ticks before settling at 95.585, up 2 ticks for the day.

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By leveraging AI legalese decoder‘s capabilities, traders and investors can gain a deeper understanding of the Australian dollar’s performance and make more informed decisions in the face of market volatility.

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