Geopolitics lift greenback; Aussie takes a hit

The US dollar has kicked off the year in solid form against its major counterparts. Judging by both USD and JPY movements, the balance of risk appears to be falling on the side of caution amid escalating tensions the Middle East as Saudi Arabia cuts its diplomatic ties to Iran. Furthermore, a magnitude 5.1 Earth quake in New Zealand may have prompted a little more (temporary) weakness for the Kiwi and residual weakness for the A$. Still, it does appear to be Middle Eastern issues that are the primary catalysts, and naturally high beta currencies are the first to fall.

Of course, it’s worth looking at the steep drop across Asian markets which is – in part – responsible for the poor performance from the antipodean currencies. Less than inspiring Chinese PMI is all the talk around the traps this morning with the Caixin/Markit manufacturing purchasing managers index recording a drop to 48.2 in December, down from 48.6 in November. Expectations were for around the 48.9 level. The Aussie and Kiwi are down around 0.9 and 0.8 percent respectively on the day.

AUD takes a hit on China / Geopolitical Tensions

As liquidity begins to return, there’s plenty to keep market participants interested this week, and certainly the US Dollar/US rates dynamic remains a key theme.  We’ve seen a rate hike in the US and now it’s time for the US economy to both justify the rate hike and show cause for more, in accordance with market expectations. For this, participants are looking to this Friday’s US non-farm payrolls for inspiration among a raft of high to mid-tier US data through the week which we will be covering in tomorrow’s report.

Locally, as the RBA are taking a breather this month, the focus will be on trade, housing and retail sales data. Without any major local themes, one may expect the Aussie fortunes will rest on what’s happening abroad, with geopolitical risk, China, and further US rates conjecture likely to be the primary directives.