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The AUD in January

AUD/USD began the year at 0.6802 and ended January at 0.7056, a 2.5 cents or 3.7% gain. The low of 0.6688 came on 3 January and high of 0.7142 on 23 January.  AUD strength last month came in conjunction with favourable moves in each of the variables that have historically driven most of AUD’s volatility, namely risk sentiment, commodity prices and interest rate differentials (see below and Chart 3).

A very positive month for risk sentiment, with many benchmark equity indices scoring double digit gains (e.g. +10.7% for both the ASX 200 and NASDAQ) came despite mounting evidence suggesting the US was falling into recession (e.g., very weak Retail Sales and Industrial Production). Rather, when combined with softer than expected US inflation-related news, the data flow added to market confidence that the Fed’s rate hiking cycle would soon cease and that rate cuts would eventuate before year-end, supporting risk sentiment in the process.

China’s rapid U-turn away from zero-covid provided positive AUD impetus on several fronts.  It supported risk sentiment on the view a strong China rebound would support the global economy and drove a significant rise in key commodity prices (e.g., iron ore and base metals). Plus, strong gains for the CNY had direct read-through to a firmer AUD/USD, in line with historical tendencies,

As for interest rate considerations, the higher-than-expected Q4 CPI data on 25 January reversed an earlier fall-back in market pricing for the RBA’s terminal rate, directly boosting AUD.  Alongside, bond yield differentials moved significantly in the AUD’s favour (e.g. the 10-year AU-US from -48bps to +4bps over the course of January).

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