Home Daily Commentaries Recovery continues as reflation narrative gathers support

Recovery continues as reflation narrative gathers support

Daily Currency Update

Price action across financial markets was largely subdued Wednesday as moves across equities, bonds, treasury yields, and most major currencies were limited to a narrow trading handle. In this environment commodities firmed with copper climbing over 2% and oil edging over $75 a barrel. With commodity currencies outperforming, the Australian dollar continued to recover the post FOMC sell-off, advancing beyond 0.7550 to test 0.76 US cents. Markets largely ignored reports that Sydney would introduce new COVID-19 restrictions, instead trusting in the government's ability to squash previous outbreaks. With little of note on today’s macroeconomic docket, our attentions remain with ongoing central bank commentary and the rejuvenation of the reflation narrative. Confidence is returning, following last week's dramatic correction, and we expect a measured and steady AUD recovery through the days, weeks, and months ahead. That said, the emergence of the Delta variant of the COVID-19 virus poses a significant risk to our bullish outlook. As the UK grapples with a fresh wave of infection a significant spillover into mainland Europe, a new outbreak could derail hopes of recovery through the latter half of the year and into 2022, unseating the global economic engine and dampening demand for the AUD.

Key Movers

The dollar index edged marginally lower through trade on Wednesday, hampered by a renewed demand for risk and outperformance across commodity currencies. The euro enjoyed mixed fortunes rallying to intraday highs near 1.1970 after local PMI numbers touched their highest level in 15 years. Particularly encouraging was the outperformance across the services sector with service PMI catching up to manufacturing PMI for the first time since COVID-19 restrictions were introduced. The single unit failed to hold onto gains though shifting back toward 1.19 into this morning’s open.
The Great British pound tested a break back above 1.40 as its own PMI data dump printed near record highs. Having given up ranges between 1.41-1.42 sterling appears to have settled into a post FOMC range between 1.39 and 1.40. We expect the currency will break this narrow handle as the reflation narrative gather momentum again. However, the emergence of the Delta variant across the country poses a concern for the recovery of the British economy and could derail our optimistic outlook.
The JPY was the day’s big loser, giving up 0.3% and marking its lowest level since the beginning of the pandemic in March last year. Japan remains in the grips of a new COVID-19 wave and with a slow vaccine take up and ageing population anything outside an extended risk-off move will likely mean the yen remains under pressure through the months ahead.

Expected Ranges

  • AUD/USD: 0.7480 - 0.7630 ▼
  • AUD/EUR: 0.6320 - 0.6370 ▲
  • GBP/AUD: 1.8330 - 1.8550 ▼
  • AUD/NZD: 1.0710 - 1.0790 ▼
  • AUD/CAD: 0.9280 - 0.9370 ▲