12th January 2021 - AUD/USD downside capped as bulls step back to the table

Updated: Feb 3

Good Morning,

Market Headlines

The S&P 500 fell 0.6%, while the NASDAQ under-performed and was 0.9% lower. Iron ore was 2% lower while oil was flat on the day. In geo-political news, the White House released a statement that it was examining further options in regards to China and how to respond to “Beijing’s irresponsible and harmful practices”. Little reaction to the news, nor to later confirmation that House Democrats had introduced Articles of Impeachment against President Trump.

Overnight Currency Ranges

AUD/USD: 0.7667 – 0.7722

EUR/USD: 1.2132 – 1.2200

GBP/USD: 1.3451 – 1.3529

USD/JPY: 104.05 – 104.40

USD/CAD: 1.2742 – 1.2836

NZD/USD: 0.7148 – 0.7202

AUD/JPY: 79.95 – 80.38

AUD/NZD: 1.0712 –1.0740 AUD Thoughts

Bulls have been taking strength from the recent spike in Treasury yields and the prospect of a growth boost from higher US fiscal stimulus. US President-elect Joe Biden takes office on Jan. 20 with Democrats able to control both houses of Congress, has promised "trillions" in extra pandemic-relief spending. This has been baked into the US dollar but the currency has been supported in recent weeks thanks to rising US yields. US government bond yields have logged big moves in recent sessions, with the Treasury yield curve experiencing a significant increase in yields in longer-dated bonds. Benchmark Treasury yields rose to 10-month highs on Monday as markets priced for higher government spending. At 99 basis points, the spread between the 2-year and 10-year Treasury yield is at its steepest since July 2017.

Meanwhile, while net AUD short positions dropped last week, they still remain in negative territory despite the relative strength of the AUD on the spot market. China and Australian trade tensions and the Reserve Bank of Australia’s QE policy could be tempering the attraction of the AUD at the same time the greenback is making a comeback.

Going forward, however, the extraordinary performance of iron ore, which moved back above $160/MT after a correction in late December, could continue to support the Aussie as the global reflationary narrative appears to be consolidating after the Democrats gained control of the US Senate. The China-Australia trade dispute has been countered by the intense Chinese buying of iron ore, offsetting the bans on coal and duties on other Australian exports.

AUD/USD traded to a low of 0.7667 overnight with further demand expected ahead of the trend channel support at 0.7640. Offering interest has likely grown but still rests ahead of the recent highs at 0.7820.

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