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Reflationary concerns help drive AUD gains

AUD - Australian Dollar

The Australian dollar edged higher through trade on Monday, extending back through 0.77 US cents as reflationary expectations gather pace. Commodities and equities both advanced Monday, dragging the AUD toward intraday highs at 0.7713, buoyed by expectations for sustained fiscal stimulus roll outs and wide spread immunisation programs. Having shrugged aside Friday’s dour US non-farm payroll print market attention has again shifted back toward long-term risk positive plays. For now, the tug of war between short-term headwinds and long run expectations for recovery seems to be shifting back toward risk assets as the market prices in greater inflation risk. There is a growing concern record low interest rates and higher savings levels could spark a boom in consumer spending when economies re-opens, rapidly swelling inflation expectations and forcing the Fed to raise interest early, while tackling increasing financial instability.

With little of note on the domestic docket attentions remains with the broader risk narrative. We expect the AUD will continue to bounce between 0.7570 and 0.7790 through the medium term.

Key Movers

The US dollars mini resurgence appears over with the dollar index drifting lower through trade on Monday, dampened by expectations of rapid inflation, weakness across the labour market, concerns for a burgeoning twin deficit and a shift back toward a risk positive narrative. The dollar lost three quarters of a percent, when measured against a basket of currencies, driven by losses against commodity currencies and an uptick in the Euro. The Euro pushed back through 1.20 following reports former ECB president Mario Draghi was close to forming a coalition government in Italy, ending a period of political uncertainty and instability. Market focus has again shifted away from short-term headwinds and is instead focused on an H2 recovery. With vaccine rollouts gathering pace and record stimulus expected to bolster and foster a boom in consumer spending fears inflationary pressures will grow rapidly are weighing on the dollar. While we expect the dollar will continue to bounce off 3 year lows through the short term, there is still a bearish undercurrent dragging the world’s base unit lower, with wholesale gains unlikely until the wider narrative adopts a permanent shift.

Expected Ranges

AUD/USD: 0.7570 - 0.7790 ▲

AUD/EUR: 0.6290 - 0.6430 ▲

GBP/AUD: 1.7680 - 1.8020 ▼

AUD/NZD: 1.0580 - 1.0720 ▲

AUD/CAD: 0.9750 - 0.9850 ▲