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  • AUD/USD has relinquished earlier gains vs its US counterpart amid a mild deterioration in risk appetite.
  • Ahead of Trade and Building Permit data on Thursday, global themes will dominate AUD/USD price action.

During the early part of Monday’s European trading session, AUD/USD rose back towards 2020’s annual highs (set on 31 December) at just above 0.7740. However, this area has proven to be a double top and the pair has reversed back below 0.7700 to trade in the 0.7680s, down about 0-.2% or 15 pips on the day. The US dollar has picked up from lows while stocks and crude oil markets have taken a knock amid a mild retracement of recent risk on optimism.

Australian Manufacturing PMI numbers for December were released early during Monday’s Asia Pacific session and did not do much to shift the dial in for AUD; the index dropped back slightly to 55.7, from November’s more than two-year highs at 55.8.

Aussie to conform to global risk appetite/USD dynamics

Thursday will see important Australian November Trade and Building Permit numbers released, which will be worth watching for AUD traders. Aside from that, however, AUD/USD is likely to mainly trade as a function of USD and global risk appetite dynamics as opposed to on domestic themes.

Themes to watch this week…

1) Risk appetite – Risk on positioning (i.e. overweight stocks and other risk assets and underweight USD) paid dividends throughout Q4 2020, but analysts and traders are becoming increasingly cautious that if risk assets, namely stocks, continue to gain at the current rate, markets might be entering the realm of “irrational exuberance”. As a reminder, markets were in such a mood in the back end of August/early September 2020. By mid-September, the Nasdaq 100 had corrected nearly 15% from its early September high. If a similar move repeats itself, risk-sensitive currencies like AUD will face some short-term setbacks.

2) US Data – Risks appear tilted to the downside for the USD with regards to how markets might interpret this week’s important ISM (released on Tuesday and Thursday) and official labour market data (released on Friday) for December. Market commentators have argued that good data might reinforce the risk on feel of the market, which has been a USD negative, while bad data might pump expectations for more monetary easing from the Fed, also a USD negative.

3) Georgia Runoff election – The two Senate seats up for grabs in Georgia will decide who gets control over the Senate (the Republicans or Democrats). While the election takes place on Tuesday, the outcome is likely to remain unknown for some time as mail-in ballots are counted. A similar reaction to the 3 November election is likely; Republicans are likely to have an early lead given stronger in-person voter turnout which will be counted faster, then the Democrats will catch up as the mail-in ballots are counted.

The Democrats need to win both seats to get a majority in Congress. The largest market reaction would be to an outcome where the Democrats manage to pull this off. In this case, expect significant further US fiscal stimulus in 2021 and higher nominal yields as a result. The USD is likely to be choppy as the outcome of the election remains uncertain, meaning AUD/USD is likely to be choppy too.