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Risk appetite resurgence sees AUD jump 1%


The Australian dollar rallied strongly through trade on Wednesday as political tensions within Italy eased and risk sentiment found renewed demand. Jumping 1% the AUD surged off intraday lows at 0.7480 to touch session highs at 0.7581 as investors bought back positions sold in panic on Tuesday.

This week has seen the AUD trade in a broader trading range than last yet our local unit still remains firmly entrenched within key support and resistance handles at 0.7450 and 0.7590 with wider levels holding at 0.74 and 0.76. The surge in risk based selling and buying has done little to change our longer run outlook and we are still looking to next months FOMC policy meeting for broader direction and guidance on U.S monetary policy. If 3 H2 rate hikes are signaled the US yield advantage would sit 1% above our own central bank rate marker and make upside momentum hard to come by as move into 2019.

Attentions today turn to Q1 Capex data, China Manufacturing news and US PCE Index print. As political tensions ease macro indicators should garner more impotence in governing direction however while the outlook remains uncertain risk trends will still drive short term volatility.

The New Zealand Dollar rallied during the overnight session to be the second best performing currency over the past 24 hours. A stark reversal on the Asian session, the Kiwi initially dipped to a low of 0.6883 before rebounding strongly on the back of improved risk appetites and positive headlines out of Europe. Opening this morning at 0.6985 against the Greenback, the NZD continues to test key resistance at the psychologically important level of 0.7.

With all eyes on the political headlines out of Italy, markets reacted strongly to news of the Italian bond market easing and a new attempt at forming government. 2-year Italian bond yields fell just over 100bps on the day, reversing more than half of the incredible move higher on Tuesday night. The news calmed markets across the world, including the NZD market which saw almost an immediate impact. While the rhetoric in Italy remains fluid at best, the market welcomed the relief nonetheless.

The Kiwi also outperformed against all of its’ crosses, posting 0.6 against the Euro, a four-month high against the Sterling at 0.5260 and 0.9223 against the Aussie. Closer to home, Investors now turn to the ANZ Business Survey as the key local focus for direction.

The Great British Pound is stronger this morning when valued against its US counterpart. The Sterling reached to an overnight high of 1.3306. However any overnight gains were short lived as the Sterling was unable to settle above the 1.33.

The political unrest in Italy continued overnight being the main focus over last 24 hours with fears the eurozone may be about to plunge into another crisis as the political situation in its third-largest economy, Italy, deteriorates rapidly. Looking ahead today the UK macroeconomic calendar all eyes will be on the release of the Nationwide House Price index for May which is to remain steady at 0.2%

From a technical perspective, the GBP/USD pair is currently trading at 1.3284 and we continue to expect support to hold on moves approaching 1.3240 while now any upward push will likely meet resistance around 1.3310.

The rebound on risk appetite following reports that Italy’s Five Star party wants the Eurosceptic finance minister candidate Savona withdrawn didn’t help the USD, which lost around 0.80% versus a basket of major currencies, specially versus the Euro.

The S&P equity Index rebounded the most in 3 weeks, up 1.27% while US 10-Year Treasury yield recovered a bit from Tuesday lows (2.76%) and is now sitting around 2.85%. WTI crude oil also had a massive recovery, spiking more than 2% to around $68.10, which was also supportive of a weaker dollar.

On the data front, we will get a good look into the current state of the US Economy with US Personal Consumption Price Index (good inflation gauge), Initial Jobless claims (job market). Chicago Purchasing Manager (business barometer) and Pending Home sales, all released later tonight.

Reuters reported yesterday, towards the start of the European session, that Italy’s Five Star party wants the Eurosceptic finance minister candidate Savona withdrawn. The market took this info positively, as it might allow a government to be formed, but that’s only if the League party agrees.

The EURUSD reaction to the news was very positive, closing around 1.1675, up more than 1.2% for the day. Italian yields also reacted positively, with the 10-year yield dropping 29 basis points. Equity indexes in the US and Euro also improved, except for the Euro Stoxx Banking Index, which was flat for the day, probably suggesting the market is still not entirely committed to short term stability.

The volatility on the EUR receded but risk reversals (the relationship between call and put options) still show a relatively higher interest on puts, suggesting there is more interest on hedging a potential downside move in the Euro. Next levels to watch for the EURUSD will be 1.1676 as short-term resistance while support should be found around 1.1510.

The risk-on sentiment and the consequent spike in WTI crude oil prices (+2%) supported a loonie recovery on Yesterday’s session. USDCAD fell as much as 1.4% to 1.2840 also supported by Bank of Canada comments that continued growth in the economy further reinforces higher interest rates moving forward. Even though the Bank of Canada left rates unchanged, the probability of a hike on the July meeting spiked to 77% (from 53% the day before), supporting a stronger CAD.

The USDCAD was not able to stay below 1.2850 for a long time and ended the session trading around 1.2875, still more than 1% lower (CAD strengthening).

Next levels to watch for the USDCAD will be 1.2833 as support and 1.29 as short-term resistance, where big option contracts of more than 2bn are expiring on May 31.