AUD/USD posts highest weekly close in seven weeks as the Big Dollar dips on Fed and yen intervention

AUD/USD finished higher last week at 0.7030 (+0.67%), its highest weekly close in seven weeks. The gains were largely driven by two notable offshore developments that more than offset a cooler-than-expected domestic inflation report for June. The US dollar was hit hard after Thursday’s Federal Open Market Committee (FOMC) meeting, where the Federal Reserve (Fed) opted to hold the funds rate steady at 3.50% - 3.75%. Fed Chair Kevin Warsh delivered a series of surprisingly dovish remarks and failed to back up his 17 June comments about the Fed’s inflation-fighting credibility, leaving markets with little clarity on the path back to the 2% target and concerned about a potential policy error in the making. The resulting ambiguity opened the door for Japanese authorities to again intervene to support the yen. Tokyo appears to have conducted yen-buying intervention on both 30 and 31 July (and perhaps again today), with estimates putting the two-day total in the range of ¥6 trillion - ¥9 trillion. There were also reports of coordinated action by the New York Fed on behalf of the US Treasury, the first such joint yen-buying intervention since June 1998. According to the Financial Times (FT), the US yen-buying was conducted against the euro rather than the dollar, suggesting the aim was to support Japan’s efforts to curb yen weakness rather than push the US dollar lower. Historically, coordinated intervention has been reserved for crisis periods, so the willingness of US and Japanese authorities to act together under current conditions was largely unexpected and reflects a stronger-than-expected commitment to curbing excessive yen weakness. The action pushed the yen to its strongest levels since early May and contributed to broad Big Dollar softness that supported the Australian dollar. A late-week rebound in global equities and risk sentiment provided an additional tailwind for the Aussie. Over the weekend and into the start of the new week, Middle East developments are again showing signs of de-escalation. President Donald Trump said Saudi Arabia, the United Arab Emirates (UAE), Qatar and even Iran had urged him to delay planned strikes as part of a renewed push for diplomacy. Trump added that a deal on the Strait of Hormuz is in sight, and that he believes one already exists, with negotiations due to begin on Monday afternoon, followed by talks on Iran’s nuclear programme. Whether this turns into a rinse and repeat of last week, with hopes of a deal collapsing as Iran digs in its heels and continues to leverage its control over the Strait, potentially through an attack on a US base or a tanker transiting the waterway, remains to be seen. Against that backdrop, AUD/USD has opened the week on a firmer note. At the time of writing, the pair is trading around 0.7046, up 16 pips or 0.23%, and at its highest level since mid-June. Looking ahead, the local data calendar is relatively light this week, with just household spending for June ahead of the Reserve Bank of Australia (RBA) Board meeting on 10 - 11 August. As a result, AUD/USD is likely to take its cues from offshore leads, including any clarity and further action around US-Japan foreign exchange (FX) coordination and developments around a Middle East deal. AUD/USD’s decline from the early-May high of 0.7277 found support in late June at 0.6863, just ahead of the then 200-day moving average. The rebound from that low appeared to be losing momentum early last week when the pair dipped to 0.6920, before finding a second wind into the end of the week. That recovery has left the pair eyeing a key layer of resistance around the 0.7080 - 0.7100 zone, the area from which it broke down in early June. A sustained break above that resistance after Friday’s non-farm payrolls report and next week’s RBA Board meeting would open the way for a retest of the May high at 0.7277.