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AUD upturn stalls as optimism countered by short-term headwinds

AUD - Australian Dollar

Having touched intraday and 12-week highs at 0.7340, the AUD retreated overnight forced lower as markets adopted a more cautious tone. Initially buoyed by positive sentiment and a risk on backdrop, the AUD tested resistance before investors absorbed profits and looked to correct positions as they balance short-term headwinds against medium and long-term optimism. While initial efficacy results suggest the vaccines will be highly effective in controlling the pandemic, a widespread global roll out is still unlikely to be complete before H2 2021, ample time for the retracement in growth to worsen, creating a deeper longer recession. These short-term headwinds are capping AUD upside, preventing an extension toward 0.74/0.75. Despite broad based US dollar weakness and a dire Covid outlook, we expect the AUD will struggle to significantly extend the upturn ahead of a vaccine roll out. We anticipate the AUD will continue to enjoy the benefits of surges in risk demand as the pandemic narrative evolves with a view to pushing toward 0.75-0.78 throughout 2021.

Attentions today shift to commentary from RBA Governor Lowe as he addresses a panel discussing Australia’s Covid economic recovery. We will be looking for insight into future RBA QE expectations and an expansion on last months policy meeting.

Key Movers

The US dollar came under sustained pressure through trade on Tuesday as a worrying COVID-19 outlook and optimism for a COVID-19 vaccine forced investors toward other assets. The dollar marked a fresh one week low as the euro, pound, Swiss franc and yen all enjoyed gains, while the Chinese yuan marked a near 30 month high. New coronavirus infections continue to increase at an exponential rate in the US with the 7 day rolling average now above 150,000, a horrifying milestone that will result in over 1 million new infections this week. With little scope for change in social distancing protocol and a next to no communication or cooperation from the White House with the Biden/Harris pandemic team, the cost and toll of the pandemic will only deepen in the months ahead.

The Great British pound outperformed Tuesday, buoyed by reports a UK/EU trade deal could be brokered as early as next week. Sterling touched 1.3270 following commentary from top UK negotiators that suggested they had briefed Boris Johnson on the success of recent talks and expect a trade deal will be reached. While fishing rights and red tape still remain a stumbling block, we expect at least a partial trade agreement will be signed, prompting another GBP push higher.

Attentions today remain with the pandemic and broader market sentiment with little of note on today’s macroeconomic docket.

Expected Ranges

AUD/USD: 0.7230 - 0.7340 ▼

AUD/EUR: 0.6110 - 0.6220 ▼

GBP/AUD: 1.7980 - 1.8320 ▲

AUD/NZD: 1.0550 - 1.0650 ▲

AUD/CAD: 0.9480 - 0.9620 ▼