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Aussie extends upturn as probability of Fed rate cut increases

AUD - Australian Dollar

The Australian dollar extended the early week upturn, consolidating moves beyond 0.68 to fall just short of a break above 0.6850, buoyed by a softening US labour market and sustained optimism US-China trade talks will ease tensions between the economic superpowers. Mixed US labour market data helped drive the AUD higher as the US dollar slipped on expectations the slowing domestic economic expansion will force the Fed to cut interest rates again later this month. Fed Chair Jerome Powell, then did little to assuage such expectations citing risk to the recent long run US expansions.

Having broken above resistance at 0.6830 on Friday there is scope to suggest further short-term upside may be found with a push above 0.6850 opening up a run toward 0.69. That said, the recent risk on environment has been largely created by the deferral of key risk events and easing tensions rather than a wholesale resolution of the ills plaguing the global economy. As such, the AUD remains vulnerable to two way volatility and a shift back toward long term resistance at 0.6680 could materialise if trade talks de-rail and domestic economic performance points to additional RBA rate cuts.

Attentions this week turn to the ECB and PBoC for key central bank policy announcements, wherein dovish commentary could help fuel the risk on turn as expectations for looser monetary policy fuel equity markets.

Key Movers

The US dollar shifted lower across the board on Friday as mixed labour market data, fuelled expectations the domestic economic slowdown would prompt additional central bank rate cuts through the short term. Softness across employment growth offset an increase in average hourly earnings and saw expectations for a fed rate cut later this month increase. CME’s Fed watch tool is now pricing in a 91% probability of a 25 basis point cut when the Fed next meets on September 18.

The Great British Pound gave up recent gains, closing down 0.4% against the US and the worst performer among G10 currencies. Sterling slipped as Brexit updates flow thick and vast. Parliament rejected calls for a snap election in a bid to force Johnson to extend the October 31 deadline. The move has however prompted Johnson to look at alternate means and loopholes to avoid the extension. With a no-deal exit firmly back on the table Sterling opens this morning back below 1.23 buying 1.2277.

Attentions this week turn to the ECB’s rate setting and monetary policy meeting as a key driver of short-term risk appetite. Neutral market estimates are calling for a 10 basis point cut to ECB deposit rates and a resumption of QE. With expectations highs a miss from the ECB could prompt a risk off move and drive bond yields higher through the short term.

Expected Ranges

AUD/USD: 0.6360 - 0.6880 ▲

AUD/EUR: 0.6070 - 0.6230 ▲

GBP/AUD: 1.7750 - 1.8150 ▼

AUD/NZD: 1.0580 - 1.0690 ▼

AUD/CAD: 0.8930 - 0.9050 ▲