The Australian dollar is showing the best performance among major currencies on Tuesday morning amid a shift in expectations for the RBA's policy path. Let me remind you that the Reserve Bank of Australia became the first major central bank in this cycle to tighten policy, raising its policy rate by 25 basis points to 3.85%. Ahead of the decision, many market participants were unsure whether this was a one-off precautionary hike or the start of a series of rate increases, but updated projections indicate that bringing inflation back to target will likely require a string of hikes. Markets currently price in another 1.5 rate rises this year. That factor, which is expected to support the AUD, cannot be ignored.

The Westpac–Melbourne Institute consumer confidence index fell 2.6% in February to 90.5 from 92.9 in January. This is a response to the RBA rate rise and higher inflation, though its impact on Australia's economic forecasts is still modest.

Meanwhile, US news is getting gloomier. Retail sales were flat in December — surprising given the holiday season — and the year-on-year retail figure fell from 3.3% to 2.4%, suggesting a meaningful slowdown in consumer demand. The NFIB business?sentiment index, instead of rising from December's 99.5, slipped to 99.3 in January. Today's US employment report could also be weak, given that almost all earlier indirect indicators point to continued deterioration in the US labor market.

On Monday morning, Kevin Hassett, Director of the National Economic Council, told CNBC to "expect a somewhat lower number of jobs." Trump's senior trade adviser Peter Navarro was even harsher on Tuesday, saying "we need to significantly lower our expectations for what monthly job gains should be." He argued that 50k would be sufficient, while market consensus currently expects about 70k new jobs. Clearly, there is a non-trivial risk of a considerably worse result than forecast — which would deal another blow to the dollar.

Speculative positioning is quickly shifting in favor of the Australian dollar. CFTC data show net long AUD positions increased by a sizable $1.3 billion over the reporting week, taking total bullish net positioning to $1.8 billion. The implied fair price is comfortably moving above the long?term average.

A week ago, we expected AUD/USD to resume its uptrend after a shallow correction, and indeed the Aussie has extended gains — briefly reaching a three?year high of 0.7131 today. We expect the rally to continue; the next target is the broad resistance area around 0.7160/0.7210. If the US nonfarm payrolls disappoint today, the AUD could climb even higher as the bullish momentum would gain additional support.