The Australian dollar rallied hard against the greenback and major crosses on Tuesday, benefiting from M&A activity, improved investor risk sentiment and tweaks to positioning ahead of key economic data and events over the next couple of days.
Here’s the scoreboard as at 7.50am AEDT.
AUD/USD 0.7559 , 0.0035 , 0.47%
AUD/JPY 85.8 , 0.35 , 0.41%
AUD/CNH 5.0090 , 0.0267 , 0.54%
AUD/EUR 0.6436 , 0.0043 , 0.67%
AUD/GBP 0.5675 , 0.0036 , 0.64%
AUD/NZD 1.0898 , 0.0016 , 0.15%
AUD/CAD 0.9729 , 0.006 , 0.62%
Rodrigo Catril, currency strategist at the National Australia Bank, said much of the Aussie’s strength was due to M&A activity announced during the session.
“M&A activity has been the big driver for the AUD with the currency quickly reversing losses incurred after a softish NAB survey yesterday,” he says.
“Unibail-Rodamco, a European owner of shopping malls, has agreed to buy Westfield for $A32.7 billion, of which around 35% will be paid in cash. While the deal won’t likely be closed until mid-2018, the FX market has moved to anticipate the associated hedging of the cash proceeds back to AUD.
“In addition to the Westfield deal, Zurich Life yesterday announced that they would buy ANZ’s Australian life insurance business for $A2.85 billion.”
Catril says that helped to propel the AUD/USD to as high as .7580 before easing lower following the release of a strong US producer price inflation report for October which rekindled speculation that consumer prices may follow suit.
Further gains in stocks, a bounce in iron ore prices and tweaks to positioning ahead of key central bank and economic data releases undoubtedly helped the Aussie’s cause.
Not only will US CPI and FOMC interest rate decisions arrive within the next 24 hours, Australia’s November jobs report and Chinese data on industrial output, retail sales and fixed asset investment will also arrive on Thursday.
Australian jobs data has almost always beaten expectations this year while recent Chinese data has also impressed, providing plenty of incentive for traders to remove bearish Aussie dollar bets.
Turning to the day ahead, central bank speeches and briefings will dominate the early parts of the session with officials from Australia, Japan and Europe all in action.
“RBA Governor Lowe speaks on an eAUD and Deputy Governor Kent speaks on the ‘Availability of Business Finance’,” says Catril. “As always, we will be monitoring what RBA speakers have to say, but given the topics we don’t expect market moving remarks.”
Lowe speaks at 9.15am AEDT with Kent following shortly after at 11am AEDT.
Australia will also receive its latest Westpac-MI Consumer Sentiment report for December at 10.30am AEDT, although its unlikely to be market moving.
Later in the session, BoJ Govenor Kuroda will speak while Donald Tusk and Jean-Claude Junker of the European Commission will address European MPs on the current state of Brexit negotiations.
On the data front, unemployment figures from the UK and Eurozone, along with industrial production from the latter, are the headline acts in Europe.
However, in all likelihood, they’ll play second fiddle to the release of US CPI for November at 12.30am AEDT and FOMC rate decision at 6am AEDT later in the day.
Core CPI is expected to increase 0.2%, leaving the year-on-year rate at 1.8%, unchanged from the level reported in October. Headline CPI is tipped to rise at a faster pace of 0.4% leaving the change on a year earlier at 2.2%, up from 2.0% a month earlier.
As for the FOMC interest rate decision, markets are fully priced for a 25 basis point rate hike and no one is really expecting much from Janet Yellen’s press conference, suggesting that if there is to be any volatility around this event, it will likely come from the Fed’s updated economic forecasts and Fed funds rate projections.
“Focus of course will be on the dot plot and our sense is that the 2018 dots are likely to remain unchanged, but there is some risk that the longer run get revised lower,” says Catril. “If so that might be a bit of a downward force on longer dated US treasury yields and the US dollar.”
He adds that “US politics may also prove to be a source of volatility with the Alabama senate vote result coming out later today”, suggesting that “a Democratic win could raise some question marks on the fate of tax reform”.