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AUD holds onto gains as reflation narrative continues to steer direction

AUD - Australian Dollar

The Australian dollar held onto gains above 0.79 US cents through trade on Tuesday, in what was otherwise a largely lacklustre session. Having touched highs at 0.7929, the AUD tracked sideways through much of the day struggling to extend beyond resistance at 0.7930 while maintaining an equally narrow band against key crosses. Investors looked to capitalise on Monday’s advance, squaring positions as risk flows faltered and equities fell. The S&P 500 and Nasdaq both drifted lower down 1% and 2.5% respectively. Tuesday marked the 6th consecutive daily depreciation for the S&P500 and highlights the divergence in equity performance and the AUD. The reflation narrative continues to drive market expectations and support a higher AUD. With treasury yields expected to remain elevated and commodity prices supported we are watching for a break above 0.7930 as a signal the AUD rally will extend toward 0.80 US cents.

Attentions today shift to domestic wage price growth. The pressure of the pandemic is likely to suppress wages and inflation metrics through the short term but instead the RBNZ could prove to be a catalyst for additional run-on yields as it delivers its monthly monetary policy and rate statement.

Key Movers

Movement across currency markets was largely muted through trade on Tuesday as price action across treasury yields calmed and investors looked to take stock and consolidate Monday’s move. The US dollar edged marginally lower after Fed Chair Jerome Powell testified in front of lawmakers repeating the banks now familiar mantra. There is little expectation the Fed will shy away from the current program of monetary policy stimulus with supports likely to be in place until the recovery shows signs of evening out. At present, the path ahead for the US remains uncertain and while there are signs economic activity will rebound strongly following the pandemic, the pressures within the labour market remain elevated and a return to full employment is likely years away.

The Great British pound came under some pressure following an uptick in unemployment Tuesday. New employment fell by more than anticipated pushing the unemployment rate to its highest level in nearly 5 years. A stark reminder just how badly the UK has been hit by the pandemic. With some 4 million Britons supported by wage subsidies, the true labour market condition is likely much worse. Having tested a break below 1.4050 Sterling found renewed momentum through the latter half of the session and opens this morning above 1.41.

Attentions today turn to the Bank of England and Monetary policy hearings.

Expected Ranges

AUD/USD: 0.7820 - 0.8010 ▲

AUD/EUR: 0.6470 - 0.6520 ▲

GBP/AUD: 1.7620 - 1.7980 ▲

AUD/NZD: 1.0720 - 1.0850 ▼

AUD/CAD: 0.9880 - 0.9990 ▼