- AUD / USD has trimmed past gains against its US counterpart amid a slight deterioration in risk appetite.
- Ahead of Thursday’s building and business permit data, global issues will dominate the AUD / USD price action.
During the early part of the European trading session on Monday, the AUD / USD rose again towards the 2020 annual highs (set on December 31) just above 0.7740. However, this area has proven to be a double top and the pair has reversed back below 0.7700 to trade at 0.7680, down around 0.2% or 15 pips on the day. The US dollar has rebounded from lows, while stocks and crude oil markets have taken a hit amid a slight pullback from the recent risk of optimism.
Australia’s manufacturing PMI figures for December were released early during the Asia Pacific session on Monday and did not do much to turn the AUD on day; the index fell slightly at 55.7, from November’s more than two-year highs at 55.8.
Aussie will adapt to global risk appetite / USD dynamics
Significant Australian trade and building permit numbers will be released on Thursday in November, which will pay off for AUD traders. Other than that, however, the AUD / USD is likely to trade primarily based on the USD and the global dynamics of risk appetite, as opposed to domestic themes.
Topics to watch this week …
1) Risk appetite: Risk in positioning (i.e., overweight stocks and other risk assets and underweight in USD) paid dividends during the fourth quarter of 2020, but analysts and traders are becoming increasingly cautious if risk assets, ie equities, continue to rise at the current rate, markets could be entering the realm of “irrational exuberance.” As a reminder, the markets were in such a good mood in late August / early September 2020. By mid-September, the Nasdaq 100 had corrected almost 15% from its high in early September. If a similar move repeats, risk-sensitive currencies like the AUD will face some short-term setbacks.
2) US Data – Risks appear to be tilted to the downside for the USD regarding how markets might interpret this week’s major ISM (released Tuesday and Thursday) and official labor market data (released on Friday) for December. Market commentators have argued that the good data could reinforce risk in the market sentiment, which has been negative for the USD, while the bad data could raise expectations of further easing from the Fed, also a negative USD.
3) Runoff election in Georgia: The two Senate seats up for grabs in Georgia will decide who takes control of the Senate (Republicans or Democrats). While the elections take place on Tuesday, the outcome is likely to remain unknown for some time while the mail-in ballots are counted. A similar reaction to the November 3 elections is likely; Republicans are likely to have an early lead given higher in-person voter turnout that will be counted faster, then Democrats will catch up as mail ballots are counted.
Democrats need to win both seats to get a majority in Congress. The biggest market reaction would be an outcome in which the Democrats succeed. In this case, expect significant additional fiscal stimulus from the US in 2021 and, as a result, higher nominal returns. The USD is likely oscillating as the outcome of the election remains uncertain, which means that the AUD / USD is likely to be as well.