Souring risk sentiment forces AUD to give up gains

AUD - Australian Dollar

The first trading session of the year prompted whippy trade and price action as the AUD failed to hang onto gains above 0.77 US cents. Spurred by a positive undercurrent of risk demand the AUD rallied through the domestic session to touch intraday highs at 0.7740,  marginally short of last week’s 21 month high With the USD under pressure the AUD appeared set for a challenge above resistance at 0.7750 and an assault on 0.78 US cents before profit-taking and a souring in risk sentiment prompted a shift in fortunes. Markets unwound gains overnight, forcing the AUD back below 0.77 and 0.7650 as mounting COVD 19 case numbers, vaccine rollout concerns and the upcoming Georgia Senate run-off spooked investors.

We anticipate the AUD will continue to enjoy sustained upside through the first quarter as US fiscal policy remains accommodative and optimism for an H2 economic rebound remain intact. That said, there are both short- and medium-term risks to this view. While the market continues to ignore near term fundamentals and instead trades on optimism for a better 2021 there is scope for the AUD to continue its upward advance, but with the pandemic showing little signs of slowing and a widespread immunization program still 3-6 months away short-term headwinds may slow the pace of appreciation through the weeks ahead.

Key Movers

Having been driven to 21 month lows through the early part of the new year’s first trading session the US dollar rebounded overnight, recouping losses to close almost two tenths of a percent higher on the day. The worlds base currency plunged to lows not seen since April 2018 as record low interest rates, a burgeoning deficit and optimism the global economy will bounce back in 2021 prompted a run on the dollar and push toward risk assets. However, as the dollar appeared sset to ring in the new year with another sharp downturn, investors appeared spooked by short term headwinds, giving up risk asset gains on a souring in risk sentiment. While the medium term forecast remains negative the specter of the pandemic and upcoming Georgia senate run off pose as significant risk events through the days and weeks ahead which could lend some short term support to the embattled USD.

Both the Sterling and Euro gave up early gains, trading down on the day. The single currency tested a break above 1.23 before slipping back below 1.2250 while Sterling fell sharply. Having touched 1.37 the Pound came under pressure as reports tighter lockdown measures will be introduced spooked investors, forcing cable back below 1.3575 to touch lows at 1.3557.

With investors appetite for risk souring throughout the day the Japanese Yen enjoyed gains against most counterparts, up 0.05% against the USD despite concerns rising COVID19 case numbers may prompt Prime Minister Suga to introduce a state of Emergency in Tokyo.
Out attentions remain with pandemic and the broader risk narrative.

Expected Ranges

AUD/USD: 0.7630 - 0.7750 ▼

AUD/EUR: 0.6190 - 0.6310 ▼

GBP/AUD: 1.7550 - 1.7820 ▼

AUD/NZD: 1.0650 - 1.0750 ▼

AUD/CAD: 0.9720 - 0.9820 ▼