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AUD falters as China ban’s Australian Coal and risk demand sours

AUD - Australian Dollar

The Australian Dollar drifted below 0.72 through trade on Tuesday, hampered by broad based US dollar strength and concerns over escalating tensions with China. The AUD corrected lower through the domestic session following reports importers in China had been told to stop buying Australian coal, raising concerns rising political tensions will start hurting key exports. While clarification suggests the ban reflects protections for China’s coal sector and quota limits the wind in the AUD sails had faded and the move was compounded overnight by a souring in risk demand. Hopes for a US fiscal stimulus package ahead of the election faded as talks between Treasury secretary Steven Mnuchin and Nancy Pelosi seemingly came to nought. While fiscal relief is unlikely now until the new year markets still broadly expect a stimulus plan will be made available, an expectation bolstered by polls that suggest a Democratic sweep. The AUD touched intraday lows at 0.7152 and opens only marginally higher this morning at 0.7160.

Attentions remain with the broader risk narrative, with a keen focus on China. With the PBoC monitoring the Yuan’s performance and political tensions at unprecedented levels the AUD could be vulnerable to a deeper correction and shift back toward supports below 0.71.

Key Movers

The US dollar advanced against a basked of major currencies, buoyed by a shift in market demand for risk and a broader Euro sell off. Investors adopted a cautious attitude to risk, following a slew of negative headlines through the last 24 hours. With US fiscal stimulus talks seemingly breaking down again and hopes for a COVID19 vaccine dealt a blow after Johnson & Johnson announced its study was paused following an unexplained reaction in one test participant. The dollar index rose over half a percent, marking its largest daily appreciation in three weeks.

The Euro and GBP were the days big losers down 0.6 and 1% respectively as talks between EU and UK leaders remain at an impasse. Key diplomats in Brexit trade negotiations have been unable to reach a compromise on a number of sticking points to date and Thursday's EU summit, the self-imposed deadline, appears unlikely to result in an end to the stalemate. The single currency fell below 1.1740 while Sterling gave up 1.30, pushing back toward 1.2925. Brexit negotiations remain front and centre for both currencies and while there is optimism an 11th hour deal will be struck; hopes are fading rapidly with a hard Brexit seemingly more and more likely.

Expected Ranges

AUD/USD: 0.7070 - 0.7230 ▼

AUD/EUR: 0.6030 - 0.6120 ▼

GBP/AUD: 1.7820 - 1.8280 ▼

AUD/NZD: 1.0720 - 1.0850 ▼

AUD/CAD: 0.9360 - 0.9480 ▼