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AUD resists deeper correction despite broader souring in risk appetite

By OFX

The Australian dollar edged higher through trade on Monday bouncing off multi-year lows and pushing back toward 0.71 despite a broad based souring in global risk sentiment. Having suffered heavy losses throughout last week investors were keenly focused on China’s return from a week long holiday period and the Yuan’s reaction to PBOC moves to ease monetary policy and stimulate growth. The PBOC elected to reduce the reserve requirement ratio for banks in a bid to stimulate lending at the weekend adding increased downward pressure on the CNY and an ongoing expectation of further AUD weakness.

Traditionally you would expect the AUD, as a proxy to the Yuan, to depreciate in the wake of market pressures however it seems yesterdays AUD outperformance stemmed from a wider need to take stock following last weeks moves. There is a sense investor were getting ahead of yesterdays depreciation, firming short term supports and adding resistance to further falls toward psychological support handles.

Broader direction will continue to be driven by wider risk trends as US bond markets and equities return, bringing with them volatility and the possibility of renewed downward pressure. We will be keenly attuned to moves above 0.71 and extensions in losses below last weeks low at 0.7040 as keen markers of direction.

The kiwi retreated to its lowest level in over 2 years on Monday against the greenback, touching 0.6423 early in the Asian session and failing to make any recovery. Trading volume was thin on the day due to the US holiday meaning the NZD/USD traded within a tight band oscillating around the 0.6440 level. The Kiwi also gained 0.4% against the EUR on Italy concerns and traded sideways against its rival across the pond.

There is also the risk-off element to unpack which continues to weigh on commodities and by association commodity correlated currencies such as the NZD, CAD and AUD. Between the rising conflicts between china and the US on the trade front and continued uncertainty on the situation in Italy, traders remain cautious on the Kiwi.

It’s shaping up to be a quiet day for the NZD with no macroeconomic datasets due out of the domestic economy on Tuesday with the domestic unit likely to continue to take its cues from the relative strength of the greenback as well as global risk sentiment. NZD/USD technical support can be seen at the daily low of 0.6420 before 0.6390 whilst on the flipside key resistances are visible at the 0.6455 and psychological 0.6500 handle.

The Great British Pound shed some of its early gains on Monday, falling 0.3% to open at 1.3087 against the Greenback. The catalyst for the volatility in the currency was again found in the headlines with the Brexit negotiations continuing to have a profound effect on the currency.

The Sterling surpassed last weeks high early in the day, hitting 1.3132 before plunging to 1.3027 later. Initially, the optimism for the EU offering a strong free-trade agreement kept the Pound well supported. However, the lustre of the offer was quickly unwound as the Greenback strengthened and comments from PM May’s spokesman dampened the likelihood of a deal. Further diminishing market hopes was a report that UK Brexit Secretary Raab won’t be heading to Brussels this week ahead of the October EU summit next week. Overall, Brexit remains at a critical juncture with far-reaching impacts on financial markets.

Tuesday looks to be another quiet day on the economic calendar for the British Isles with little to drive momentum. Attention remain affixed to the on-going Brexit negotiations for direction.

With US currency markets closed for Columbus Day the Greenback looked offshore for direction and is slightly higher against the Euro on the back of Italian and EU frictions. The EUR/USD rate moved down towards 1.1470 after Italy's Deputy Prime Minister Matteo Salvini said that European Commission President Jean-Claude Juncker and Economic Affairs Commissioner Pierre Moscovici are the real enemies of Europe.

Equity markets were mixed with China's central bank on Sunday cutting the level of cash that banks must hold as reserves, aimed at lowering financing costs. The Dow rose 0.2%, while the S&P500 was flat. Tech stocks underperformed, with the Nasdaq down 0.7%. Gold came under selling pressure dropping under $1200 mark.

Quiet day on the economic calendar today with nothing really to note until tomorrow when the New York Fed President John Williams is to speak at an event in Bali.

Another fairly quiet session to start the week as holidays across a number of countries meant liquidity remained thin in the markets. The Euro drifted off from the open of 1.1525 as sentiment waned within the Eurozone as concerns remain for Italy’s budget policies following disagreements between government and the EU Union overnight. Yields on 10-year bonds in Italy rose to 4 year highs making it more expensive to borrow money.

EUR/USD pulled off 0.4% after seeing an overnight low of 1.1460 following a decline in Germany Industrial Production for the month of August and Sentix Investor confidence declining from 12.0 to 11.4.

On the Agenda this evening is the release of German Trade Balance as the EUR/USD opens this morning at 1.1490.

The Canadian Dollar slipped lower through trade on Monday edging below 0.77, touching intraday lows at 0.7685. The Loonie underperformed in what was largely a quiet start to the week as most North American investors enjoyed an extended weekend in observance of Columbus Day and Canadian Thanksgiving celebrations. With little to drive domestic data the CAD mirrored moves in crude oil prices driving lower through short early trade before finding support on hopes Chinese stimulus will spur increase demand for the worlds liquid asset.

Having touched 0.7685 the Canadian Dollar pushed back through 0.77 to close the session buying just 0.7717 US cents. Attentions now turn to equities, broader risk sentiment and ongoing oil price fluctuations for short term direction.