The Australian dollar appears poised to challenge psychological resistance at 0.8000, but some traditional supporting factors are facing short-term risks that could dent the bullish case.
The AUD/USD gains are mainly due to a surge in key commodity prices, along with rising 10-year Australian government bond yields that have kept pace with benchmark U.S. Treasury yields. The AUD is a proxy for commodity market sentiment, but is also a proxy for investor appetite in equities and emerging markets.
Global equity markets have stalled at extended highs due to the rise in yields, but have so far resisted a significant correction nL1N2KS2MA.
The 10-year Treasury yield has almost caught up with the yield on the S&P 500 dividend nL1N2KS1QV- with valuations stretched, a correction lower following the stall would not surprise.
Emerging market assets have been among the main beneficiaries of the reflation trade and massive liquidity provided by central banks. The iShares MSCI EM ETF EEM rose nearly 13.5% from the start of 2021 until last Tuesday, but has since fallen around 4.3% and is showing signs of turning lower.
The rise in key commodities nL1N2KS0VT may be enough to sustain the AUD/USD uptrend through 0.8000, but if the other key drivers of AUD sentiment falter, a reversal lower could be significant. AUD/USD appears technically on course for the 2018 high at 0.8136, but bulls might want to consider buying downside AUD/USD put options for insurance against a sharp turn lower.
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