AUD trades sideways as broader ranges narrow

AUD - Australian Dollar

The Australian dollar crept higher through trade on Tuesday, supported by underlying USD weakness and a small uptick across risk assets. Trade was choppy and moves relatively modest as ranges across currency markets narrowed. The AUD has struggled to break outside a 70 point range bouncing between 0.6930 and 0.70 US cents through the last 2 weeks as the ebb and flow of risk demand controls broader moves. Markets largely ignored the uptick in new Coronavirus infections in Victoria and New South Wales, confident strict proactive measures will contain the spread through the short term.

Direction continues to derive from markets demand for risk, fluctuations in risk aversion are creating sustained volatility across financial markets, albeit in narrowing ranges. The AUD continues to find support in a positive risk correlation, propped up by unprecedented levels of fiscal and monetary policy stimulus. We expect the AU will remain range bound through much of Q3, bouncing between 0.68 and 0.70 with a shift in the current risk profile the biggest threat to that position. Setting aside COVID-19 headlines, attentions this week turn to the EU summit as leaders meet to flesh out the specifics of the EU’s recovery fund. IF a compromise can be agreed this week and the final plan mirrors the proposal put forth by the EU commission we can expect a renewed EURO upturn and subsequent USD sell off, with AUD/EUR crosses perhaps testing a break back below 0.6050 and 0.60.

Key Movers

The US dollar drifted lower through trade on Tuesday as inflation expectations increased. US CPI data showed prices in June jumped over half a percent (largely driven by a near 13% increase in petrol prices) raising concerns the record levels of fiscal stimulus are going to drive living costs higher at a time the Federal Reserve cannot increase interest rates, potentially derailing any consumer led recovery.

The Euro upturn continued Tuesday pushing through 1.14 as investors eye this week’s EU summit and potential rescue package. The promise of a 750 billion euro recovery fund has helped drive the combined unit higher as markets begin pricing in a swift EU recovery. As the US continues to battle the COVID-19 outbreak expectations euro zone will be better placed to bounce out of the pandemic are increasing opening the door to extended Euro gains through the medium term.

Expected Ranges

AUD/USD: 0.6880 - 0.7000 ▲

AUD/EUR: 0.6050 - 0.6190 ▼

GBP/AUD: 1.7820 - 1.8130 ▼

AUD/NZD: 1.0580 - 1.0720 ▲

AUD/CAD: 0.9430 - 0.9520 ▲