-AUD rises as Trump hits USD, risk appetite returns and Turnbull goes on.

-Duration of rebound will be determined by global factors, not domestic.

-Analysts divided as some forecast stability, others say AUD overvalued.

© Greg Brave, Adobe Stock

The Australian Dollar edged higher from August's two-year lows Tuesday as investors rotated back into "risk assets" after President Trump criticised the Federal Reserve for its tightening of US monetary policy, which has been a source of pressure on other currencies this year.

President Trump said in an interview with Reuters he is "not thrilled" that his choice of Fed chair, Jerome Powell, has continued to raise US interest rates since taking the bank's top job in February.

The comments prompted fears of a slowdown in the pace at which the Fed raises interest rates, which threw the Australian Dollar and a host of other currencies a lifeline Tuesday because it is US economic outperformance and the resulting Fed policy response that has driven much of the Aussie's 6% 2018 decline against its North American rival.

"President Trump’s ramped up verbal jawboning in recent weeks suggests that current USD strength may be the upper bound of the White House's tolerance level," says Viraj Patel, a strategist at ING Group. "Constant Fed criticism may keep a downside skew in US rates markets when it comes to pricing in Fed policy tightening – and on the margin, this will help to keep USD strength at bay."

Trump-induced price action comes alongside the latest developments in Australian politics, which saw Prime Minister Malcolm Turnbull survive a snap confidence ballot among lawmakers.

Turnbull is said to have called the ballot himself, before surviving it by a margin of 48-35, although it is not clear whether this will be enough to prevent uncertainty over the future of the government from setting in.

"Tradition suggests that you don't call for a ballot without knowing what the outcome is going to be, and so Turnbull clearly had a good idea that he would remain as leader. The outcome of 48-35 means this issue can be set aside for now, but speculation is rising that an early election may settle the issue (current target May 2019, talk of October)," says Annette Beacher, chief Asia Pacific macro strategist at TD Securities.

Above: AUD/USD rate shown at daily intervals.

The AUD/USD rate was quoted 0.17% higher at 0.7348 Tuesday while the Pound-to-Aussie rate was up 0.18% at 1.7482. The Aussie was quoted higher against around half of the G10 basket and saw small losses against its Kiwi counterpart as well as the Euro and Swiss Franc.

Above: Pound-to-Australian-Dollar rate shown at daily intervals.

For the Australian Dollar, what will matter most during the months ahead will events on the international stage as well as those inside the Reserve Bank of Australia, which operates independently of the government.

The Australian Dollar has been weighed down of late by the Turkish currency crisis and escalating tensions between the US and Chinese governments. Both of these are important for the Aussie given the currency's sensitivity to changes in sentiment toward the global economy.

These concerns came as downward pressure on the Aussie was increasing due to a loss of "yield support", which has been undermined by the combined effect of both US and Australian monetary policy.

After all, the Reserve Bank of Australia has held its interest rate at a record low of 1.5% for two years now. Meanwhile, the Federal Reserve has raised its rate seven times, taking the top end of the Fed Funds rate range above the RBA's cash rate and all the way to 2%.

Until 2018, the Aussie Dollar had long enjoyed support from interest rates and bond yields that were typically higher than those elsewhere in the developed world. Changes in interest rates impact currencies significantly because of the push and pull influence they have over international capital flows and their allure for short-term speculators.

"The RBA Minutes were pretty neutral, but the message is clear - the next move is up. The relative 2-year rate spread favours AUD/USD stability now, ending months of downtrend, and still points higher for AUD/NZD," says Kit Juckes, chief currency strategist at Societe Generale.

RBA officials included nothing in the minutes of their latest policy meeting, released Tuesday, to discourage markets from the view that Australian interest rates are going nowhere for a little while yet. However, analyst opinions on the likely implications this will have for the currency are divided.

Juckes and the Societe Generale team say the Australian Dollar rout is over for now and are even betting on a continued rise in the AUD/NZD rate during the months ahead. However, others are less optimistic.

"AUDUSD is still expensive," says Mark McCormick, North American head of FX strategy at TD Securities. "Indeed, our regressions argue that AUDUSD should be trading around 0.71, suggesting that it still looks rich. Against the CAD and NZD, the model implies 0.9585 and 1.0870. The result is that the AUD looks the most expensive to NZD, increasing the scope that further AUD weakness is likely to come through NZD rather than CAD."

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