Aussie struggles to break higher despite improving risk sentiment

AUD - Australian Dollar

Despite a day full of headline newsflow and an improvement in risk appetite, the AUD struggled to break free from the shackles of risk-off ranges, failing to extend back beyond 0.73 US cents. Having opened below 0.7230, the Australian dollar found support through the domestic session as demand for risk improved. Chinese property developer Evergrande survived another day and the PBOC announced a 120billion yuan injection into the banking system, a signal it is willing to support financial markets through this most recent crisis. Having shifted above 0.7250, the AUD tracked sideways through the rest of the day as traders sidelined larger bets ahead of the FOMC policy update. The Fed offered little to disperse the market's current expectations. Despite a relatively hawkish assessment of current economic conditions and a further step toward tapering, the market curiously forced the USD lower in the moments immediately following the meeting allowing the AUD to jump to intraday highs at 0.7290. The rally was however short-lived, and investors unwound the move and Fed President Powell delivered his post-meeting address. Drifting back toward 0.7250, the AUD opens in much the same position as yesterday, buying 0.7237 US cents.

Our attentions today remain with the Evergrande saga and whether it can repay a 84million US dollar bond coupon. A default without central support could drive another risk-off move, creating ructions across financial markets.

Key Movers

Price action across currency markets was largely muted through trade on Wednesday despite plenty of headline newsflow to drive direction. Having survived another day, the Evergrande saga did little to change the underlying risk narrative while markets offered little in the way of response to the Fed and FOMC policy update. Policymakers affirmed their commitment to tapering QE as long as the recovery toward policy goals continue, indicating an announcement could be upcoming in December with a view to start reducing bond purchases in December, with a full wind up due by mid-2022. The positive outlook was affirmed by a shift in the Fed’s dot plot. A further two members brought forward their expectations for a rate hike with half the board now of the view a rate hike next year will be appropriate. Despite this hawkish assessment, the pace of monetary policy normalisation is in line with market estimates and yesterday’s meeting did little to change aspersions. The USD index is little change while the euro tested a break below 1.17 and sterling slipped below 1.3650.

Our attentions today remain with the Evergrande saga as the catalyst to spur risk direction while the Bank of England policy meeting could spark cable volatility. While we don’t expect the MPC will make a move away from the current policy platform markets are keenly attuned to any language that hints at a shift toward tighter policy conditions in 2022.

Expected Ranges

AUD/USD: 0.7170 - 0.7320 ▲

AUD/EUR: 0.6150 - 0.6230 ▲

GBP/AUD: 1.8620 - 1.9020 ▼

AUD/NZD: 1.0270 - 1.0380 ▲

AUD/CAD: 0.9190 - 0.9290 ▼