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James Hyerczyk

A drop in U.S. Treasury yields perhaps due to safe haven buying related to renewed geopolitical tensions over North Korea may be providing support for the Australian Dollar on Wednesday.

At 1200 GMT, the AUD/USD is trading .7483, up 0.0012 or +0.16%.

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Late Tuesday, North Korea cancelled high-level talks with Seoul, denouncing military exercises between South Korea and the United States, which may have thrown into question next month’s unprecedented summit between Kim Jong Un and U.S. President Donald Trump. This news may be making investors nervous, sending them into safe haven assets like the Japanese Yen and U.S. Treasurys. It’s a developing story, but something that should be watched.

Early Tuesday, the U.S. Dollar firmed enough to trade near a five-month high, helped by gains in long-term U.S. Treasury yields. The dollar rally stalled last week after weaker-than-expected April U.S. inflation data was lifted on Tuesday when strong U.S. retail sales sent 10-year Treasury yields surging to a seven-year peak of 3.095 percent.

On Wednesday, the Australian Dollar is also recovering from early session weakness, as traders responded to a disappointing first-quarter wages report and its implications for the Aussie interest rate outlook.

Australian wages grew by 0.5% during the first quarter, below the 0.6% consensus estimate, while the annual pace of wage growth remained steady at 2.1%. This was unchanged from the downwardly revised 0.5% growth seen in the final quarter of last year.


Shortly after the U.S. opening, investors seem to be showing little reaction to the weak wages data. This could be because of position-squaring ahead of tomorrow’s reports on Employment Change and the Unemployment Rate. However, it is more likely a reaction to the drop in Treasury yields.

Later today, investors will have a chance to react to a slew of economic data including Building Permits, Housing Starts, Capacity Utilization, Industrial Production and Mortgage Delinquencies. Stronger-than-expected data will increasing the chances of a third rate hike by the Fed.

Building Permits will be closely watched. They are expected to come in at 1.35 million, unchanged from the previous month. A lower than expected number will indicate the impact of rising mortgage rates on the housing market. This will be a sign the economy may be cooling. This could pressure interest rates that could be supportive for the AUD/USD.

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