As we entered 2012, the Australian dollar (AUD) continued its surge reaching a 5-month high of 1.0757 - the strongest level since 1 September 2011 and only +300 pips away from the all-time high of 1.1080 on 27 July 2011.

A few factors contributed to this upswing. Most notably, successful government bond auctions in France, Italy, Spain and Portugal provided short-term relief to financial markets in terms of significantly lowering the borrowing costs for Euro Area countries. This is largely a by-product of the massive 3-year loan facility engineered by the European Central Bank (ECB) back in December 2011, which provided European banks with total funding of EUR 489 billion at 1.0% for a 3-year period.

Additionally, global manufacturing data showed some signs of improvement in January 2012. Manufacturing activities across China, India, Germany, Euro Area, UK and the US at least satisfied global investors that the world is not slipping into another recession. Risk appetite continues to pick up and contributed to the recent upswing in risk assets such as equities, commodities and the higher-yielding currencies.

The lack of volatility in the financial markets also created a good environment for the Australian dollar to climb higher.

In terms of local currency movement, the AUD/USD was able to outperform in the short-term and its ability to climb again will continue to ride on positive global risk sentiment. Likewise, the return of fear surrounding the European sovereign debt crisis would once again contribute the risk aversion and a possible lowering of the AUD/USD.

Our latest Citi FX G10 forecasts indicate that the 0-3 months forecast for the AUD/USD may reach 1.01 levels while maintaining its 6 to 12 months target at 0.93 levels.