Daily Currency Update

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AUD fails to keep pace with risk rally

AUD - Australian Dollar

The Australian dollar failed to keep pace with equities, emerging market and commodity led currencies on Tuesday, unable to capitalise on broad based US dollar weakness and a sustained run of positive market sentiment. Vaccine hopes and the promise of US fiscal stimulus spurred a rally across equity markets with the S&P 500 and NASDAQ both up over 1%. Despite the USD marking fresh 2 ½ year lows the AUD was unable to extend beyond resistance at 0.7370/0.74. Having ignored the RBA’s monthly monetary policy meeting it appears markets were reluctant to trace AUD gains in the face of increasing diplomatic and trade tensions with China. China has levied a number of trade restrictions against Australian exports over the last 6 months weighing on the AUD and perhaps taking the sheen off some positive sentiment driving other commodity currencies higher. While the restrictions have yet to filter through to key exports like iron ore the impact of reduced activity with the world’s second largest economy continues to dampen the near-term outlook. While we expect the AUD will remain well bid in the current environment a consolidated break above 0.74 is needed if we are to gap higher and make a run at 0.75. While attentions remain with the broader risk narrative commentary from RBA governor Lowe and 3Q GDP data provide domestic direction. We expect Lowe will offer little on top of yesterday’s policy meeting and third quarter GDP is unlikely to proffer any major surprises. We expect the AUD to bounce between 0.7280 and 0.7410.

Key Movers

The US dollar fell sharply through trade on Tuesday giving up 0.6% when measured against a basket of major counterparts and making it the largest daily depreciation in a month. Sustained demand for risk amid hopes leading vaccines will be available before the end of the year and renewed growth expectations for 2021 have fuelled demand for commodity currencies and risk assets driving the USD toward new two and a half year lows. The US remains mired in the midst of the COVID-19 pandemic with little sign the rate of infections is slowing down. As the effect of a Q4 retracement become evident it is likely the US faces a longer road to recovery with suppressed monetary policy. These expectations of a longer run accommodative monetary policy environment is driving Dollar weakness with little sing the trend will change.

The Euro surged through 1.20, advancing 1% to touch highs at 1.2075, a two and a half year high. The single currency surged amid rumours Brexit talks were now entering the final stages suggesting a deal is in sight. Sterling was unable to keep pace but still enjoyed a boost pushing back through 1.34 to touch highs at 1.3440. With the Euro breaking psychological resistance at 1.20 and extending meaningfully beyond the handle the door is now open for the currency to extend gains toward 2018 highs at 1.25.

Expected Ranges

AUD/USD: 0.7280 - 0.7410 ▲

AUD/EUR: 0.6050 - 0.6190 ▼

GBP/AUD: 1.8080 - 1.8320 ▲

AUD/NZD: 1.0350 - 1.0520 ▼

AUD/CAD: 0.9480 - 0.9560 ▼