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Australian dollar recovers losses as risk sentiment returns

AUD - Australian Dollar

The Australian dollar opens near 0.77 US cents this morning having marked fresh one-month lows below 0.76 through trade on Thursday. Appetite for risk waned as investors looked to haven assets, chasing treasuries and the USD higher through the Asian session, forcing the AUD below resistance at 0.7640 and 0.76, toward year-to-date lows at 0.7590. Yesterday’s risk off tone has been attributed to retail investors banding together to target a selection of small cap stocks in a bid to inflict losses across a number of hedge funds. With suggestions the speculative moves were designed to induce a squeeze on markets, online trading platforms have been forced to introduce trading restrictions. With reports the SEC is actively monitoring further unusual activity, normal trade resumed overnight allowing risk demand to again gather pace. The AUD recouped most losses extending back toward highs at 0.7698.

While the AUD has recouped yesterday’s risk off shift, the break below supports does open the door for a change in the broader narrative. With the currency struggling to extend beyond 0.78 US cents and the run of higher highs and higher lows now over, we anticipate the AUD will remain range bound with extensions toward 0.7820 rebuffed and contractions approaching 0.75 supported. With the broader narrative largely unchanged through the last month, we are looking to any signal that may force a shift in investor outlook as the catalyst to break direction.

Key Movers

The US dollar failed to hold onto gains enjoyed on the back of Wednesday's risk off shift, instead it drifted lower as sentiment improved and demand for equities rebounded. Domestic data sets saw Q4 GDP expand at just 4%, well down on the Q3 surge and 2.5% down on Q4 2019. While grim reading, the soft print was hardly a surprise for investors given the resurgence in COVD-19 case numbers through the last 3 months of 2020. Despite little evidence the pandemic will end in the near term, early high frequency data sets suggest the promise of fiscal stimulus and the national vaccine roll out will prompt an uptick in activity through Q1. With US jobless claims down on last week there is a suggestion the USD downturn may have reached the bottom.

The euro climbed back through 1.21 as German CPI jumped in January and confidence in the euro area was better than first expected. While the single currency has struggled to extend back toward highs at 1.23, it remains relatively well supported above 1.20 for now. The big test for the common currency lies ahead with growth forecasts suggesting the continent will be slow to recover from the COVID-19 pandemic, left behind by the UK and US, as disparities in vaccine roll outs begin to emerge.

Expected Ranges

AUD/USD: 0.7580 - 0.7720 ▼

AUD/EUR: 0.6270 - 0.6420 ▲

GBP/AUD: 1.7720 - 1.8020 ▼

AUD/NZD: 1.0650 - 1.0730 ▼

AUD/CAD: 0.9750 - 0.9890 ▲