- AUD slips in Europe as AUD/USD meets resistance on charts.
- Aided by Asian market rally as USD weakness seen building.
- Overlooks creeping 'lockdown' and tensions over Hong Kong.
- Is seen following S&P 500 and copper futures prices higher.
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The Australian Dollar underperformed Thursday as AUD/USD retreated from a formidable resistance barrier on the charts after being lifted in an overnight risk rally, although multiple analysts are tipping an upside breakout as likely.
All majors gained on the Aussie except the Euro after the antipodean unit outperformed overnight amid a rally in Asian financial markets, but it now needs fresh momentum to overcome nearby technical resistance.
"AUD/USD lifted back towards the top end of its recent 0.68‑0.70 trading range because of the weaker USD. Improving Chinese economic data and the ongoing strength in China’s equity market also provided support to AUD," says Carol Kong, a strategist at Commonwealth Bank of Australia. "Weaker than expected jobless claims data will add to market participants’ concerns that the coronavirus outbreak is impacting the US labour market recovery."
The ASX 200 and China's Shanghai Composite Index advanced along with commodity prices overnight, lifting the Aussie along with them as investors overlooked Australia's suspension of extraditions to Hong Kong, joining Canada and Britain after China inserted its security apparatus into the city. New Zealand was also reported to be contemplating following suit and has placed its "relationship settings" with the city under review.
Investors have continued to position themselves for a global economic recovery by bidding stocks, commodities and risk currencies higher and may have been encouraged Thursday by the conciliatory tone adopted by China's foreign ministry in comments about the relationship with the U.S. overnight.
"The only thing markets want to short is cash, because it has been rendered worthless by central banks," says Kit Juckes, chief FX strategist at Societe Generale. "Australian yields may not be high, but they are by far the highest of the G10 current account surplus economies. China can keep a lid on its currency despite 3% yields, but not Australia. Despite the it Covid-19 flare-up in Victoria, economic activity is recovering in the rest of Australia and the currency is yet again hammering away at AUD/USD 0.70."
Above: AUD/USD rate shown at 15-minute intervals alongside S&P 500 futures (orange).
"The US dollar has continued to weaken during the Asian trading session with USD/CNY falling back below the 7.0000-level and reaching its lowest level since the middle of March. At the same time the Chinese equity markets have continued to extend their advance," says Lee Hardman, a currency analyst at MUFG. "Loosening liquidity conditions and the cyclical upturn for China’s economy are providing support. The latest PMI surveys sent a clear signal that China’s economy continues to lead the global recovery from the COVID shock. The ongoing rally in industrial metals prices is consistent with that picture."
Risk markets have been unconstrained by the still-growing coronavirus pandemic that produced another record number of new infections in the U.S. on Wednesday, a pandemic which has led to a second wave outbreak in Australia that's increasingly disrupting the economic recovery. Australia's largest state New South Wales closed its border with the second largest, Victoria, on Thursday as local officials grew nervous about the fresh outbreak that saw all of Melbourne placed back into 'lockdown' this week.
"Increasing chatter for US equities to break higher from range, and the USD to break lower again in a way akin to late-May. If we see a range-break on the DXY index, it may target 95.70 and 94.60, the two troughs prior to this. For now, favour sell USD on rallies. In particular, the likes of EUR and AUD may well be poised to extend higher if they can breach their respective resistances at 1.1350 and 0.7000," says Terence Wu, a strategist at OCBC Bank.
Above: AUD/USD rate shown at daily intervals alongside copper futures (orange).
"Currency pairs have been driven by broad market sentiment as opposed to idiosyncratic factors. The strongest relationship that we see is with respect to the AUD and copper prices, but we suspect that this is really another way of expressing broad risk appetite," says Bipan Rai, North American head of FX strategy at CIBC Capital Markets. "We see the same relationship (albeit less strong) between oil prices and the CAD. Going forward – keep an eye on the degree of co-movement between the AUD and copper."
The two locking down states account for close to half Australia's economy so renewed disruptions of daily life are expected to slow the recovery in what was one of the first countries to contain the coronavirus in the initial outbreak, but for Australia's Dollar the trajectory of stock and copper prices matter more. Those have risen in line with hopes of a global recovery but will be tested on Thursday by the weekly unemployment claims report from the U.S.
Consensus is looking for the number of new weekly claims to have fallen from 1.42 million to 1.37mn last week, which may not reflect the impact that America's swelling second wave is thought to be having on confidence and consumer as well as business activity. There is a risk of the job market recovery having been disrupted by the second wave, which might not be taken well by either stock markets or commodity prices and could ultimately undermine the Aussie.
Above: AUD/USD rate shown at weekly intervals with Fibonacci retracements of 2018 downtrend and 21, 55 (red) and 200-week (green) moving-averages.
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