- AUD/USD has rallied back to make fresh highs of the day at 0.7329, having attracted buying interest at 0.7300.
- The Aussie trades close to monthly highs and remains underpinned amid risk-on/soft USD conditions.
- AUD/USD is eyeing up a third attempt at breaking above the top of its recent range at 0.7339.
Strength in risk-sensitive currencies such as AUD, NZD and CAD vs USD in recent trade has boosted AUD/USD back to close to highs of the day above 0.7325, with the pair now nursing gains of around 30 pips on the day or 0.4%.
AUD benefits amid positive risk flows/soft USD conditions
Global equity and crude oil markets trade mostly higher on Wednesday, as do bond yields on both sides of the Atlantic, amid a broad improvement in risk appetite that is also benefitting the more risk-sensitive currencies (including AUD).
Aside from a small risk on pop triggered midway through Wednesday’s European session following further information from Pfizer on its vaccine (Phase 3 trials now show 95% effectiveness rate and the Co. is pushing for authorisation immediately), no other headline or specific market theme can be pointed to explaining why risk appetite has improved; market participants continue to weigh the implications of recent vaccine updates, the pandemic’s worsening in the Northern Hemisphere as winter approaches, the increasingly dovish tone of major global central banks and the post-US election aftermath.
Thus, most major US and European equity indices trade at or close to recent highs, as do crude oil markets. Risk sensitive USD pairings are no different and have benefitted this week from a gradual deterioration in appetite for the US dollar.
USD seems to have somewhat lost its safe-haven status in recent days; vaccine news seems to have actually helped USD in the short-run given higher US treasury yields. But many participants likely agree that the vaccine news and associated faster than previously expected end to the pandemic (which will be a huge positive for EM and risk-sensitive FX) will, in the end, be a USD negative.
Some argue that the market is under-pricing near-term risks presented by the continued spread of the virus in the US over the last few weeks, which has resulted in states one by one going back into some form of lockdown. Shouldn’t this be bullish for the safe-haven USD?
Perhaps not, given that the Eurozone (which has already gone back into lockdown) is seeing its virus numbers stabilising and major Asian economies such as China and Japan both look to have kept the virus relatively well under wraps. The Chinese economy has already been one of the world’s best performing in 2020 and this looks set to continue into 2021, while the Eurozone, though suffering right now, might be setting itself up for a stronger Q1 2021 if it can get virus numbers under control by Christmas – all while US Covid-19 deaths continue to rise in the US – this might undermine USD vs the likes of JPY, CNY and EUR going forward.
Meanwhile, FOMC members, including Chairman Powell and Vice Chairman Clarida, have been sounding increasingly pessimistic regarding the near-term outlook for the US economy given lockdowns amid rising Covid-19 cases. With some members hinting that the Fed’s ongoing unconventional refinancing programmes could be ramped up, as well as the rate of QE purchases reassessed, the tone of developments this week has been unmistakably dovish.
AUD could be one of the best beneficiaries amid softer USD conditions going forward; Australia is mostly Covid-19 free, as is their most important trade partner China. Meanwhile, the RBA is essentially now signalling that it is done easing. AUD is already up 4.2% on the month vs USD and is one of the best monthly performers in the G10.
AUD remains likely to continue to gain going forward so long as risk appetite remains buoyant and USD on the defensive.
AUD/USD moving back towards top of recent week’s range
Since 5 November, AUD/USD has traded within a 0.7221-0.7339 range. After failing to break above this range on Tuesday, and reversing to lows around the midpoint of this range at 0.7270, the pair has made decent strides to the upside today and is eyeing a third attempt at breaking above resistance at the 0.7339 level.
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