7th October 2021 - AUD/USD underpinned by Wall Street ahead of RBA

Market Headlines

The equity market mood flipped to risk-seeking, the S&P500 currently up 1.5%. Bond yields are slightly higher, while currencies were mixed. There was little news to drive markets, apart from a monetary policy easing in China. The US dollar index is up 0.2% on the day. EUR fell from 1.1310 to 1.1267. USD/JPY rose from 113.00 to 113.55. AUD rose from 0.7020 to 0.7054. NZD ranged sideways between 0.6740 (13-month low) and 0.6763. AUD/NZD rose from 1.0400 to 1.0450.

US 2yr treasury yields rose from 0.60% to 0.63%, while the 10yr yield rose from 1.37% to 1.44%. Markets fully price the first Fed funds rate hike to be in July 2022. Australian 3yr government bond yields (futures) rose from 1.04% to 1.06%, while the 10yr yield rose from 1.58% to 1.62%. Markets fully price the first RBA rate hike to be in July 2022.

Commodities, Brent crude oil futures rose 4.1% to $73, copper rose 1.7%, gold fell 0.3%, and iron ore rose 2.2% to $103.

Overnight Currency Range

AUD/USD 0.6995 0.7054

EUR/USD 1.1266 1.1327

GBP/USD 1.3224 1.3286

USD/JPY 112.75 113.55

NZD/USD 0.6740 0.6763

USD/CAD 1.2754 1.2844

USD/CNH 6.3685 6.3788

AUD/JPY 78.86 80.02

AUD/NZD 1.0368 1.0450

AUD Thoughts

The AUD/USD pair maintained its bid tone through the mid-European session and was last seen hovering near the top end of its daily trading range, around the 0.7035-40 region.

Having shown some resilience below the key 0.7000 psychological mark, the AUD/USD pair witnessed some short covering on Monday and recovered a part of the previous day's losses to a fresh YTD low. The global risk sentiment stabilized a bit in reaction to reports from South Africa, suggesting that Omicron patients only had relatively mild symptoms. This, in turn, led to a strong recovery in the equity markets and benefitted the perceived riskier aussie. The upbeat market mood got an additional boost after the People’s Bank of China (PBOC) slashed the bank's Reserve Requirement Ratio (RRR) by 50bps, releasing 1.2 trillion-yuan long-term liquidity. Despite the supporting factors, the uptick lacked bullish conviction amid the prevalent bullish sentiment surrounding the US dollar. The prospects for a faster policy tightening by the Fed acted as a tailwind for the greenback and might cap gains for the AUD/USD pair.

Markets seem convinced that the Fed would be forced to adopt a more aggressive policy response to contain stubbornly high inflation and have been pricing in the possibility of lift off by May 2022. Apart from this, rebounding US Treasury bond yields favours the USD bulls. This, in turn, makes it prudent to wait for a strong follow-through buying before confirming that the AUD/USD pair has formed a near-term base and positioning for any further appreciating move.

There isn't any major market-moving economic data due for release from the US, leaving the USD at the mercy of the US bond yields. Apart from this, developments surrounding the coronavirus saga and the broader market risk sentiment will influence the USD price dynamics. This should provide some impetus to the AUD/USD pair ahead of the RBA policy decision today.

AUD/USD made a steady rebound overnight and was trading at the upper end of its 0.6995-0.7054 range into the close. Further demand can be expected around 0.7000 while offering interest builds between 0.7100 and 0.7200.

Event Risk Data Today

Aust: The RBA is expected to leave policy unchanged at their December meeting; the focus will instead be on any discussion of recent data and risks in the Governor’s decision statement.

NZ: RBNZ Assistant Governor Hawkesby will give a post Monetary Policy Statement address to the KangaNews NZ Debt Capital Markets Summit at 9am, and Deputy Governor Bascand will deliver a keynote speech titled 'Reflections of a Central Banker' at the Financial Services Council ReGenerations Conference at 9am. The markets expects the bi-monthly GDT dairy auction tonight to result in a 2% rise in whole milk powder prices.

China: The trade surplus is anticipated to remain wide in November, supported by robust demand for Chinese exports as the global economy recovers and restocks (market f/c: US$83.60bn). Authorities meanwhile seem comfortable with the renminbi’s value, with foreign reserves little changed through 2021 (November market f/c: $3206.30bn)

EUR/GER: The third estimate of Eurozone Q3 GDP will confirm the component detail outlined in November (market f/c: 2.2%). December’s ZEW survey of expectations should continue to reflect uncertainty over the outlook. Supply chain issues also likely hampered Germany’s industrial production in October (market f/c: 0.9%).

US: October’s trade deficit is anticipated to remain wide on the run to Christmas (market f/c: -$66.9bn).