AUD/USD off highs but remains well bid above 0.7600

AUD/USD rose above the 0.7600 level for the first time since June 2018 on Thursday before reaching highs around 0.7640. The pair has since handed back some of these gains and trades just below 0.7620, with the bulls for now keeping it well supported above the 0.7600 level.

Risk-on markets keeping AUD bid

Risk-sensitive AUD is benefitting from the market’s broadly positive risk appetite; US equities are up, with the S&P 500 and Nasdaq Composite indices hitting all-time highs on Thursday, crude oil markets are up, precious metals are up and for the most part industrial metals including iron ore (a key Australian export) are up.

As to why markets are in such a good mood; although the Fed didn’t opt to increase the monthly pace of asset purchases or tweak the composition of those asset purchases in last night’s meeting, Fed Chair Jerome Powell was keen to reassure market participants that the Fed’s ultra-accommodative monetary policy stance is not going anywhere any time soon. Meanwhile, the latest news on the Brexit front suggests the EU and UK are closing in a deal, potentially by the weekend that would avert what market participants see as a disastrous no-deal outcome at the end of the transition period on the 31^st of December and US Congressional leaders seem on the brink of clinching a deal on further Covid-19 fiscal aid.

Domestic Aussie factors also helping

AUD also received a tailwind from domestic factors during Thursday’s Asia Pacific session. Firstly, Australian November jobs numbers were much better than expected; the economy added 90K jobs (versus expectations it would add 50K) and 84.2K of these were in full-time employment (which is a better sign of economic health given full-time jobs tend to be better paid and more consistent in the long-term). Meanwhile, the unemployment rate dropped to 6.8% versus expectations it would remain unchanged at 7.0%. Despite this drop in the unemployment rate, the participation rate rose from 65.8% to 66.1% (versus expectations for it to rise to 66.0%).

ANZ notes that 74K of the 90K headline gain came from Victoria alone. In terms of the outlook for the Australian jobs market, a “number of leading labour market indicators have improved rapidly, including ANZ Job Ads, suggesting the employment recovery should continue into early-2021” says the bank.

Elsewhere, the Australian government delivered its Mid-Year Economic and Fiscal Update, which projected real GDP to grow at a rate of 4.5% in 2021, a little lower than the previous forecast for growth of 4.75%. However, the bad news from the government pretty much ends there; the government said it still expects resource exports to increase 5% in 2021 and 2022 despite the country’s trade war with China. Moreover, the government’s budget deficit forecast for 2021 was revised lower to A$ 197.7B from its previous forecast of A$ 213.7B.

ANZ thinks that risks lie to the upside with regards to the government’s fiscal position; given the “Treasury’s conservative assumptions on the iron ore price, a smaller budget deficit of closer to $190bn seems likely for the 2020-21 financial year”.