Australian dollar outperforms as risk on narrative drives currency to 6-month highs

AUD - Australian Dollar

The Australian Dollar surged through trade on Monday, extending last weeks gains amid broad based US weakness. Despite increasing US/China trade tensions, grim macroeconomic data sets and violent protests in the US investors overwhelmingly adopted a risk on tone, buoyed by the prospect of an economic rebound as the global economy begins to re-open. Commodity and risk sensitive currencies rallied strongly as the US dollar decline continued. The Aussie dollar pushed through 0.67 and 0.6750 before breaching 0.68 for the first time since January. Having rallied 2.6% since the domestic close on Monday the AUD has outperformed all major counterparts. While the risk on narrative has helped fuel demand for the growth sensitive currency, an upturn in commodity prices, led by iron ore has helped underpin the move. Iron Ore pushed through $100 a tonne on Friday as increasing demand and issues with supply forced prices sharply higher.

Attentions remain squarely affixed to the broader risk on storyline with sustained improvements in equities and risk demand driving sustained AUD upside. That said, there are downside risks still in play. The global outlook is far from certain and as trade tensions increase and COVID-19 continues its spread around the world a shift in the risk on mood could prompt a swift reversal in AUD fortunes through the medium term.

Watch the RBA policy announcement and rate statement today for more monetary policy guidance. We expect they will maintain the current policy setting.

Key Movers

The US dollar downturn continued through trade on Monday as the world’s base currency gave up ground against most major counterparts. Grim macroeconomic data and escalating social upheaval amid a broader global risk on move forced investors away from the USD, promoting gains for the CAD, GBP, EUR, JPY, AUD and NZD. Despite the overwhelming flood of negative headlines throughout the weekend markets have persisted with the risk on drive, choosing to ignore the current uncertainty and instead focus on expectations for recovery through the second half of 2020.

The Euro continued its upturn as the prospect of a 750 billion Euro recovery fund fueled a run through 1.11. The combined unit had come under increasing pressure prior to last weeks announcement as expectations the common currency and trade union would not be able to withstand the impacts of the COVID-19 pandemic amid growing concerns surrounding joint debt obligations weighed on investors. The EU’s plan surpassed market expectations and doused calls the common area should break up.

Attentions turn to the ECB this week, wherein policy setters are expected to increase the current QE program by 500 billion Euro, while renewed Brexit negotiations weigh on any GBP upturn.

Expected Ranges

AUD/USD: 0.6530 - 0.6880 ▲

AUD/EUR: 0.5980 - 0.6150 ▲

GBP/AUD: 1.8120 - 1.8580 ▼

AUD/NZD: 1.0720 - 1.0880 ▲

AUD/CAD: 0.9150 - 0.9280 ▲