AUD/USD: Nurses the biggest drop in five months below 0.7900 amid reflation fears

• AUD/USD couldnt hold the fresh three-year high of 0.8008, bounces 0.7858 recently.

• Rally in Treasury yields weighed down stocks, US dollar reversed loses from seven-week low on upbeat data.

• Vaccine, stimulus optimism continue while Aussie Q4 CAPEX also rallied.

• Australia Private Sector Credit, Bond moves and US covid relief package chatters will be the key catalysts.

AUD/USD licks its wounds around 0.7860, after a stellar rise to pierce the 0.8000 threshold, followed by the heaviest slid in many days, during the early Friday morning in Asia.

The aussie pair jumped to the fresh high in three years while flashing 0.8008 as the peak the previous day as risks remained positive during Asia and early European session. However, the jump in the Treasury yields afterward joined strong US data to drag the quote to 0.7858 and mark the biggest drop since late September 2020.

Although Fed policymakers keep ruling out the latest surge in Treasury yields from the list of considerations for monetary policy decisions, the bond market moves have been wild and dominant off-late. Recently, the US 10-year Treasury yields refreshed yearly, currently around 1.51%, top after the 7-year note auction put the cherry on the top of the markets rush for risk-safety.

Treasury yields wild moves to the north ignore Fed officials‘ non-consideration for monetary policy decisions while taking clues from the upbeat US data suggesting economic recovery and extra upside pressure on the inflation. Among the released data, US Q4 GDP matched upbeat market forecasts whereas the Durable Goods Orders and Jobless Claims were also on the positive side. On the other hand, Australia’s Q4 Private Capital Expenditure (CAPEX) reversed -3.0% prior with +3.0%, versus 0.0% forecast.

Qualitative catalysts to the risks were also positive as Johnson and Johnson came out with the update suggesting the strongest vaccine for the coronavirus (COVID-19) after Pfizer and Moderna conveyed over 90% effective rates. Further, market chatters that the US policymakers are on the move to vote the $1.9 trillion stimulus on Friday also favored risks. Alternatively, China warned the US over its naval ships that crossed boundaries in the South China Sea.

Against this backdrop, Wall Street benchmarks drop heavily with Nasdaq leading the south-run with a daily loss of 3.52%. The underlying reason for equities rout could be traced to the plunge in the tech-shares that mainly blame Treasuries.

Looking forward, Australias Private Sector Credit data for January will offer immediate direction but major attention will be given to the US Treasury yields. On that side, talks surrounding the US stimulus and PCE data will be the key to watch.

Despite the pullback from the multi-month high, AUD/USD remains above 0.7820-13 key support area, comprising a three-week-old support line and highs marked during April 2018 and January 2021. As a result, bulls can stay hopeful to witness 0.8000 again on the charts. Though, its run-up beyond the latest top has a bumpy road before the year 2018 peak surrounding 0.8135.

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