(18 JULY 2017)DAILY MARKET BRIEF 1:Surging demand for higher yielding currencies send AUD

Lacklustre economic data are piling up in US, the Fed has abandoned its hawkish rhetoric for a cautious one amid faltering inflation pressures. Since mid-May, the greenback has lost more than 5.2% on a trade-weighted basis, while the dollar index fell below 95, its lowest level since September last year, as US rates reversed gains.

Prospects of low interest rates in US have prompted investors to seek higher returns elsewhere and more specifically across the Pacific, namely Australia. Interest rate differential between Aussie and US bonds is appealing for investors. Moreover, the Reserve Bank of Australia has revised its economic outlook to the upside recently and acknowledge the recent improvement, both on the growth and inflation sides.

Investors did not wait on the RBA hawkish tone to start building long AUD position. Speculative positioning, as reported by the CFTC, showed that total net long future position rose from zero to 37.5% of total open interest over the past six weeks. Despite this extreme level, we think they is still room for further increase of speculative positioning as investors will continue to discount a tightening move from the Fed in the short-term.

AUD/USD has broken the key 0.7849 resistance (high from June 2015) and is on its way to test the following one at 0.8164 (high from May 2015). However, a temporary correction cannot be ruled out in the short-term but it will only be a step back to jump higher.

By Arnaud Masset