Australian dollar range bound as risk sentiment ebbs and flows
Monday 25 January, 2021
Daily Currency UpdateThe Australian dollar crept lower through trade on Friday, yet still held onto gains above 0.77 US cents as risk assets remain elevated. Sentiment skewed to the upside last week as the promise of ongoing US fiscal stimulus, no major changes in tax policy and a commitment to QE from the Fed all helped support the risk backdrop and promote expectations for a medium-term recovery. Having faltered on approach to 0.7780 the AUD found support on moves approaching 0.7705 edging marginally higher in to the close to open the week at 0.7720 US cents.
We expect risk sentiment, elevated commodity prices and buoyant domestic fundamentals will continue to provide a floor underneath the AUD, with support on moves below 0.7600 and toward 0.75 intact for now. Markets month-end rebalancing could help support further AUD upside this week however we anticipate resistance on moves above 0.7780 and approaching YTD highs at 0.7820. Our attentions this week turn to domestic CPI data Wednesday ahead of FOMC minutes and US advance GDP numbers as key macroeconomic markers. While risk sentiment remains largely positive, near-term pandemic headwinds will limit upside. With new variants emerging, vaccine roll outs delayed on the back of logistical issues and national lockdowns likely to remain in place through May the reality 2021 may not see an immediate return to normal sinks in across markets. Watch ranges between 0.7600 and 0.7820.
Please note there will be no commentary tomorrow, Tuesday the 26th, with Australian markets closed in observance of Australia Day.
Key MoversThe US dollar tracked lower through last week after Biden signed a series of executive orders and memorandums reversing Trump Era policies and enacting immediate change across immigration, climate change, racial equity and pandemic response. Risk demand remains an important driver for near term USD direction and Biden’s changes coupled with a promise from Treasury Secretary Janet Yellen the new administration would not roll back the 2017 tax cuts and clear signals the Fed is committed to accommodative monetary policy and the world’s base currency struggled to gain any upward momentum as markets chased risk assets and commodity currencies higher through last week. That said with medium-term forecasts improving there is scope to suggest a H2 moderation in USD weakness is possible.
The GBP remains supported by the ongoing risk narrative, however recent data sets suggest the economy has been hit heavily by the third lockdown. December retails sales and January PMI’s both fell short of expectations and out expectations turn to unemployment and weekly earnings data Tuesday for a better insight into broader economic health. COVID has brought the UK health system to its knees and further evidence the economy is faltering could prompt a swift correction for Sterling. With restrictions now expected to be in place until the European summer the pound remains increasingly vulnerable to swings in risk demand.
We expect the Euro will remain range bound as the market theme remains relatively consistent. With near term pressure on the USD there is some scope for Euro upside, however we believe the single currency will struggle to push back toward December highs above 1.23. Growth across Europe continues to lag the US and with lock downs across the continent likely to be extended there is little hope the Eurozone will see any near term relief of growth concerns. Further divergence in expectations could see the Euro soften through Q2 and into the end of H1.
- AUD/USD: 0.7640 - 0.7780 ▼
- AUD/EUR: 0.6280 - 0.6410 ▼
- GBP/AUD: 1.7580 - 1.7820 ▲
- AUD/NZD: 1.0680 - 1.0840 ▼
- AUD/CAD: 0.9770 - 0.9850 ▲