Jane Foley, Research Analyst at Rabobank, suggests that the better tone has put AUD/USD just shy of its 200 days sma at around 0.7275 and from a technical perspective a break above this level could trigger a leg higher in the AUD. Key Quotes “We would argue, however, that the Aussie’s fundamentals may not be robust enough for it to sustain its gains vs. the USD. Along with coal, iron ore is Australia’s largest export. Having reached multi year lows last year, iron ore delivered to Qingdao has now experienced a 33% rise from its weakest December level. So far this year the benchmark spot iron ore price has rallied over 18% to reach above the $50 a tonne level for the first time since October 2015. The better tone is one of the factors supporting the AUD, but we are sceptical as to ability of iron ore to maintain its upward momentum. The rally in iron ore is in part supported by supply disruptions earlier in the year. January’s supply disruptions have been followed by reports that Chinese steel producers are restocking after the Lunar New Year holiday. If sustained, the better tone in the iron ore will feed back into higher household and tax revenues in Australia. However, supply issues are likely to prove temporary and Chinese demand is likely to continue to be curtailed by over-capacity in the country’s residential and productive infrastructure. On the assumption that iron ore prices start to sag in the weeks ahead, AUD/USD is set to lose some support. Also bolstering the outlook for the AUD has been the perception that the Australian economy is sufficiently robust for the RBA to avoid another rate cut this year. The sharp falls in the value of Australia’s effective exchange rate since 2013 will have contributed to the loosening in monetary conditions in Australia. Ironically, any sustained pick-up in the value of the AUD will likely temper this optimism and, given the low inflation backdrop, increase the risks that the RBA will restart its rate cutting cycle. We expect that headwinds coming from China will ensure that the risk of further easing remains on the cards this year. Another factor that could curtail the AUD this year is a broad based recovery in the USD. The USD has fallen hard this year as the market priced out expectations of Fed rate hikes in 2016. In our view, this move may be overdone. The modest improvement in US CPI inflation and wage data suggest signal there is an upward creep in US price pressures. These are also signs that the pressure on the US manufacturing sector could be bottoming while the services sector remains robust. Overall, we maintain our expectation that AUD/USD could drop back below 0.70 on a 1 to 3 mth view.” For more information, read our latest forex news.