The Australian dollar is getting smoked

Tony Margiocchi / Barcroft Media / Barcroft Media via Getty Images

The Australian dollar was hammered for a second consecutive session on Thursday, tumbling to a fresh three-month low against the greenback.

Here’s the scoreboard as at 7.50am AEDT.

AUD/USD 0.7663 , -0.004 , -0.52%
AUD/JPY 87.35 , -0.26 , -0.30%
AUD/CNH 5.0983 , -0.0143 , -0.28%
AUD/EUR 0.6573 , 0.0053 , 0.81%
AUD/GBP 0.5823 , 0.0016 , 0.28%
AUD/NZD 1.1187 , 0.0005 , 0.04%
AUD/CAD 0.9845 , -0.0009 , -0.09%

The Aussie was undermined by three key factors on Thursday: a cautious speech from RBA deputy governor Guy Debelle, the ECB’s October monetary policy decision, something that put a rocket under the US dollar as the euro tumbled, along with technical selling as the Aussie crashed below key support.

Kicking off proceedings, Debelle delivered a slightly dovish assessment on the current state of Australian labour market conditions despite recent strength in employment growth.

“Our assessment is that there still remains a sizeable degree of spare capacity in the labour market,” Debelle said.

While he added that he expects that “spare capacity will be gradually reduced in the period ahead”, Debelle also struck a cautious tone on the outlook for wage pressures.

“As it is reduced [labour market slack], we will be alert to the possibility that these developments we see in other labour markets, in terms of subdued inflation in the face of minimal spare capacity, occur here too,” he said.

That is, that tight labour market conditions may not lead to a pick-up in wage pressures as would normally have been the case in the past.

That saw the AUD/USD briefly fell below the 77 cent level before it found support from dip-buyers.

AUD/USD 5-Minute Chart

However, while Debelle failed to get a sustained reaction in the Aussie, ECB Mario Draghi certainly did, sending the euro sharply lower, and US dollar sharply higher, during his press conference following the bank’s October monetary policy meeting.

While Draghi announced that the ECB will halve the size of its asset purchase program to €30 billion between January and September next year, an outcome that was widely expected by most market participants, he dropped plenty of dovish clues throughout his press conference — including that the bank’s asset purchase program could be extended if conditions warranted — that saw the euro come under significant selling pressure.

“The announcement of the tapering and the stressing that accommodation would continue well beyond the end of this tapering affirmed the gradual and cautious approach of ECB,” said Tim Riddell, macro strategist at Westpac.

“One aspect that may have provided some surprise was the ECB’s cautious tone and the confirming that maturing principal [of the ECB’s asset purchase program] would be re-invested — they are most definitely not moving to a double tapering any time soon.”

The euro tumbled upon the conclusion of Draghi’s press conference, sending the US dollar index sharply higher.

The greenback also gained following favourable developments on US tax reform.

As a result, the AUD/USD came under significant pressure, falling below key support and its 200-day moving average. The convincing break below those levels likely triggered further selling.

It’s now fallen for five consecutive sessions, and sits at the lowest level since July 12.

AUD/USD Daily Chart

Turning to the day ahead, it’s likely to be a quiet one in Asia despite the release of Japanese inflation figures for September at 10.30am AEDT. It’s been a while since this report has delivered a surprise, let alone a significant market reaction.

Australian producer price inflation for the September quarter will be released a hour later, although it will come and go without barely creating a ripple in the Aussie.

Movements in the Chinese yuan and Japanese yen (particularly the former) will likely dictate terms in Asia given the scale of the US dollar move overnight.

If there is an event to watch out for, it will be Australia’s High Court ruling on seven dual-citizen parliamentary members due out at 2.15pm AEDT.

Tapas Strickland, economist at the NAB, said that most attention will be on Australian deputy prime minister Barnaby Joyce’s ruling.

“If Mr Joyce is found ineligible, the government will likely need support from the lower house cross bench in between the ruling and the by-election that would result for Mr Joyce’s seat of New England,” he says.

Any lift in political uncertainty is unlike to support the Aussie.

Later in the session, the main event comes from the US with the release of preliminary Q3 GDP figures.

“US GDP Growth is expected to be 2.6%, down from the 3.1% pace last quarter due to hurricane impacts,” says Strickland.

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