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Month End Balancing forces AUD to give up assault on 0.74

AUD - Australian Dollar

The Australian Dollar opens weaker this morning amid month end rebalancing and growing Chinese diplomatic tensions. Having extended beyond 0.74 to mark highs at 0.7407 the AUD retreated overnight, dragged lower as equities gave up gains and investors looked to square positions at month end, capitalising on the AUD’s 4.5% appreciation throughout November. The dollar came under further pressure after an inflammatory tweet posted by the Chinese Foreign ministry saw diplomatic tensions boil over again. The doctored image posted in the wake of the Brereton report findings into Australian Special Forces conduct in Afghanistan was labelled “Deeply offensive” by Scott Morrison as the PM demanded an apology; a request denied by Chinese officials. The latest spat is just another example of how rapidly the relationship has deteriorated since Morrison led calls for an independent review and inquiry into the origins of COVID19. With little hope of a near term resolution, expectations China will continue to push its agenda via trade weighed on the AUD prompting a correction to intraday lows at 0.7345.

Attentions now turn to the RBA and the final Monetary Policy meeting before year end and February next year. Having cut rates and expanded its QE platform last month, we expect the RBA will maintain the status quo. Anything short of a shock rate cut or significant and surprise adjustment to its QE program will likely mean the meeting will pass without fanfare and have little impact on currency markets.

Key Movers

The US dollar bounced off 2 ½ year lows on Monday amid souring risk appetite and a correction across equities driven by softer than anticipated US economic data. Home sales fell over 1% in October while factory output throughout the Midwest slowed through November as the region grapples with the effects of COVID 19’s resurgence. The Dollar index rose two tenths of a percent pushing back toward 92.0 before running out of steam. Despite yesterdays reprieve there is little expectation the worlds base currency is about to break the current long-term downtrend. The impacts of COVID19 and the Q4 retracement in economic activity coupled with the ongoing absence of fiscal support means the road to recovery will be much longer than first expected, suppressing monetary policy expectations well into the future.

The Euro opens marginally lower, slipping off 3 month highs and 1.20 amid month end rebalancing and expectations the ECB may intervene to suppress further gains. Having signaled it would carefully monitor the exchange rate to ensure a rapid appreciation did not impact Europe’s ability to recover from the impacts of the COVID19 pandemic, the ECB has opened the door to speculation it may use monetary policy to control any ongoing uptick. Having advanced 2.6% in November and with signs national lockdown measures are controlling the spread of the virus there is an expectation with the introduction of a vaccine Europe will be well placed to enjoy a swift rebound in activity come 2021.

The GBP opens marginally lower amid ongoing extensions in the deadline for an EU/UK trade deal. After a period of intense talks, even a partial agreement is yet to be reached, prompting growing concern a hard exit will be the reality. While most anticipate an 11th hour compromise can be found, the year end deadline is fast approaching, limiting the time needed for any deal to be ratified. With hopes a deal would be reached last week gone our attentions turn to this week’s headlines.

Expected Ranges

AUD/USD: 0.7280 - 0.7410 ▼

AUD/EUR: 0.6120 - 0.6210 ▼

GBP/AUD: 1.8020 - 1.8280 ▲

AUD/NZD: 1.0380 - 1.0520 ▼

AUD/CAD: 0.9480 - 0.9620 ▼