AUD Strengthens as Yield Gap Attracts Buyers

Key Moments

Hawkish RBA Tone Fuels Renewed AUD Strength

AUD/USD is drawing support from a combination of firm central bank messaging in Australia, a widening policy divergence with the United States, and strong demand for risk assets. The pair has pushed to fresh multi-year highs, with the sustainability of the move now hinging on how US labor market data lands later in the session.

At a business lunch in Sydney, Reserve Bank of Australia Deputy Governor Andrew Hauser underlined the central bank’s view that inflation remains uncomfortably elevated and must not be allowed to become entrenched. His remarks reinforced the signal from last week’s rate increase, highlighting domestic capacity constraints as a key driver of price pressures rather than merely a risk factor. This stance aligned with the RBA’s February shift in emphasis and reiterated that further tightening remains on the table if inflation does not moderate.

The speech triggered a renewed move higher in the spread between Australian and US 2-year government bond yields, taking the differential back toward the peaks reached last week. The current advantage for Australian yields is now the largest since late 2016. With markets anticipating at least one additional RBA rate hike this year, while pricing at least two Federal Reserve rate cuts over the same period, the relative policy outlook has been a powerful tailwind for the Australian currency.

Risk Appetite and Correlations Support the AUD/USD Upswing

Recent market behavior underscores how closely AUD/USD has been tracking interest rate dynamics and broader risk sentiment. Correlation analysis over the past week and month shows a strong and persistent relationship between the currency pair and short-term yield differentials, with correlation coefficients at 0.75 and 0.87, respectively.

Robust risk appetite has further amplified the move. Over the past week, AUD/USD has traded almost in tandem with gold, silver, and Nasdaq 100 futures, with correlations between 0.95 and 0.97 – effectively moving in near lockstep in directional terms. Strength across other Asian currencies has also been relevant, as reflected in the positive relationship with USD/CNH. These dynamics have collectively underpinned the Australian dollar’s advance.

However, the drivers behind the rally may face a critical test later in the session. The release of US January nonfarm payrolls, alongside revisions to earlier data that could be “hundreds of thousands lower than initially reported,” has the potential to challenge the current backdrop of strong risk appetite and broad US dollar softness.

Building Fed Easing Expectations Ahead of US Jobs Release

Market speculation has grown around the possibility of a softer US employment report. This has intensified after comments from Kevin Hassett, the Director of the National Economic Council and a senior White House economic official, who pointed to the risk of smaller payroll gains ahead. Hassett argued that slowing population growth and stronger productivity mean softer jobs numbers should not be read as a deterioration in underlying economic momentum.

These remarks have been interpreted by some traders as an attempt to temper expectations going into the data, contributing to US dollar weakness and an increase in the amount of Federal Reserve easing priced into interest rate markets.

Fed funds futures now price 58 basis points of easing in 2026, implying at least two full 25bp reductions with around a one-in-three chance of a third. Only last week, less than 46 basis points of cuts were being priced, with Hassett’s remarks combining with soft retail sales and wages data to spark a dovish repricing.

Consensus forecasts point to a 70,000 increase in nonfarm payrolls. However, after Hassett’s comments, the so-called whisper number is likely lower. The unemployment rate is expected to hold at 4.4%, a figure that is seen as offering the clearest snapshot of overall labor market conditions. Revisions to payrolls in the 12 months to March 2025 are also expected to draw attention, though their relevance for interpreting more recent trends remains in question.

A stronger-than-expected report would likely generate a modest rebound in the US dollar. Conversely, a downside surprise could extend gains in cyclical currencies such as the Australian dollar. An especially weak outcome, however, might revive concerns about the global growth outlook, potentially undermining risk appetite and leaving AUD vulnerable to underperformance against the USD and other majors such as JPY and EUR.

AUD/USD Technical Landscape Points Higher

From a technical perspective, AUD/USD has broken decisively above the January high at .7094, propelled by Hauser’s hawkish comments and ongoing strength in the yen. The pair currently trades just below the February 2023 peak at .7160. A clear move through .7160 would bring the June 2022 swing high at .7282 into view as the next upside level.

On the downside, the former resistance at .7094 now appears poised to act as initial support. Below that, a minor support zone emerges around .7050, with more substantial support situated near .6900.

Although there are some questions about whether the 14-day RSI can register new highs to fully confirm the latest price breakout, the broader message from oscillators remains constructive. The technical setup continues to favor long positions over shorts in the near term.

Key AUD/USD Levels at a Glance