AUD softens as markets maintain a cautious tone

AUD - Australian Dollar

Tuesday’s cautious undertone permeated trade on Wednesday as investors maintained a risk-off mantra, forcing the AUD toward intraday lows at 0.7345. Price action across currency markets was largely muted and the AUD maintained a relatively narrow trading handle through much of the domestic session bouncing between 0.7380 and 0.7405 before a downward overnight correction. Mirroring a modest softening across equity markets the Australian dollar slipped through 0.7350 before finding support and bouncing between 0.7345 and 0.7380. The AUD remains vulnerable to broader fluctuations in risk narrative and the undercurrent of global drivers. While a risk-off vibe persists, further upside will be hard-won. Our attentions today turn to commentary from Fed and FOMC committee member Kaplan for his insights on softening labour market performance and the likely timeline to tapering, while the ECB policy update presents the possibility for volatility across the AUD/EUR cross. With policymakers expected to reduce the size of pandemic bond purchases, a deviation from market expectancies could drive price action.

Key Movers

Price action across currency markets offered little to excite investors through trade on Wednesday as Tuesday’s risk-off vibe dampened recent sentiment-driven gains and allowed the USD to enjoy a modest uptick. The Great British pound remained firmly entrenched within a handle between 1.3730 and 1.3790, the euro edged toward 1.18 ahead of tonight’s ECB policy update and the CAD softened following the Bank of Canada policy meeting. As expected the board elected to maintain the current policy setting amid weaker than anticipated Q2 growth. Expectations for further tapering remain in play but with the pace of recovery behind schedule, some investors looked to adjust their expectations weighing on the Canadian dollar.

Our attentions now turn to the ECB. Over the last week there have been growing calls for the bank to move away from its current policy mandate and toward normalisation of monetary policy. We expect the ECB will announce a reduction in its PEPP Pandemic bond-buying program from 80bn to 60bn and temper language around future policy updates in a bid to shift away from any possibility of rate cuts. A move towards neutral could help provide near term euro support; however, we anticipate that this will be unwound in the medium-to-longer term as the path to policy normalisation for the ECB remains well behind its major central bank counterparts.

Expected Ranges

AUD/USD: 0.7290 - 0.7450 ▼

AUD/EUR: 0.6190 - 0.6290 ▼

GBP/AUD: 1.8520 - 1.8820 ▲

AUD/NZD: 1.0330 - 1.0420 ▼

AUD/CAD: 0.9290 - 0.9420 ▲