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AUD upturn falters again as 0.78 in sight

AUD - Australian Dollar

The Australian dollar retreated through trade on Wednesday, drifting below 0.7750 as bond yields and equities fell and hopes for additional US fiscal stimulus drove US dollar gains. Having touched intraday highs at 0.7780, markets largely ignored a strong uptick in job vacancies despite the run-on implications for a sharp correction in unemployment rates and upward inflation expectations. Instead, markets looked to a fall in oil prices and commentary from Fed officials suggesting loose monetary policy will be tapered as the Fed moves nearer to its economic goals.

The new year upturn has clearly stalled now, and analysts appear torn between extending the rally beyond resistance at 0.7780/0.7820 and signs of a shift in underlying US dollar weakness. A move away from inflationary concerns has helped the world's base currency lift off 3-year lows, prompting a halt in the recent AUD rally. While underlying domestic fundamentals continue to favour the Australian dollar, our attentions turn today to US unemployment claims and commentary from Fed Chair Jerome Powell as key markers for monetary policy and economic performance. With the US recording its highest daily coronavirus deaths on record yesterday and vaccine roll outs behind schedule, any short term recovery is unlikely adding a possible floor below the AUD.

Key Movers

The US dollar advanced through trade on Wednesday, despite 10-year US Treasury yields falling 4 basis points and the Fed dismissing inflationary concerns. The dollar advanced across the board, bucking last week's trend and moving against treasury yield price action, instead buoyed by a shift in risk demand and a fall in equities, coupled with the promise of increased fiscal stimulus relief. With Democrats now holding an effective majority in both houses of government, it is expected an increase in income support from $600 to $2,000 a week will quickly pass through Congress. President-Elect Joe Biden is tapped to deliver an outline of his COVID-19 relief plan today, with expectations the Democrats will look to increase the current program significantly. A substantial stimulus platform could help add further upside support for the USD through the worst of the pandemic and prompt a shift in the medium-term outlook as a cushioned recession should run into a quicker recovery post pandemic. That said, as sentiment continues to drive demand, a surge in appetite for risk led by equities could benefit commodity currencies and emerging markets. With price action faltering we are keenly watching direction through the next 24-48 hours as a possible marker of changes in the underlying narrative.

Expected Ranges

AUD/USD: 0.7670 - 0.7780 ▲

AUD/EUR: 0.6290 - 0.6390 ▲

GBP/AUD: 1.7480 - 1.7720 ▲

AUD/NZD: 1.0680 - 1.0820 ▲

AUD/CAD: 0.9790 - 0.9920 ▼