- The Australian dollar rallied across the board on Monday, assisted by strength in stocks and most commodity markets.
- Positive, if not detailed, trade negotiations between the US and China were cited as the main factor behind the rally.
- The economic calendar is incredibly quiet today, leaving sentiment and technicals to dictate direction.
The Australian dollar rallied across the board on Monday, assisted by strength in stocks and most commodity markets following the conclusion of trade negotiations between the US and China over the weekend.
Here’s the scoreboard as at 7am in Sydney.
AUD/USD 0.7582 , 0.0071 , 0.95%
AUD/JPY 84.17 , 0.80 , 0.96%
AUD/CNH 4.8193 , 0.0352 , 0.74%
AUD/EUR 0.6430 , 0.0035 , 0.55%
AUD/GBP 0.5645 , 0.0062 , 1.11%
AUD/NZD 1.0911 , 0.0057 , 0.53%
AUD/CAD 0.969 , 0.0015 , 0.16%
Rodrigo Catril, Senior FX Strategist at the National Australia Bank, said the Aussie was supported by positive, if not specific, trade negations between the US and China that concluded over the weekend.
“News that the US will hold off on imposing trade tariff on China while negotiations remain ongoing has helped risk sentiment overnight,” he said in his morning note.”
Risk sentiment has helped the Aussie with the VIX index drifting down to 13.02 from 13.42, but the performance of commodities has probably been a bigger factor.
“Based on our fair value model, we think the AUD deserves to trade a little bit higher with risk sentiment and commodities more than offsetting the negative influence from higher US yields.”
After a tentative push higher in Asia, the Aussie’s gains went into overdrive as European equity markets opened, surging higher as even the smallest dip was bought.
That coincided in a reversal in the US dollar index (DXY) which hit a fresh multi-month high above 94 in early European trade before sliding lower throughout the remainder of the session.
The dip-buying theme in the Aussie extended into North American trade, eventually leaving the AUD/USD with a gain of close to 1%. It recorded similar moves against the Japanese yen and Chinese yuan.
Whether the Aussie’s climb continues today will likely be determined by sentiment and technicals, rather than economic data. Put simply, there is none, at least none that will interest traders in Asia.
The economic events calendar is also quiet in Europe and the US with only second-tier released scheduled.
To Catril at the NAB, Italian politics may come back to the fore later in the session.
“Italy’s Five Star and League coalition is aiming to form a government… with relatively unknown Italian lawyer Giuseppe Conte being seen as a possible Prime Minister,” he says.
“The major concern here is that the coalition doesn’t have the money to fund its expansionary plan and the idea of introducing a new class of short-dated government notes called ‘mini BoTs’ to pay state arrears has spooked the market.
“These mini BoT’s are effectively like a parallel currency and could in theory circumvent the strict rules in the EU Stability and Growth Pact.”
Cartil says yields on 10-year Italian government bonds surged by 15 basis points (bps) on Monday while the spread to 10-year German bunds widened by another 21bps to 185bps.
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