The Australian dollar continues to languish at multi-year lows

Harry How/Getty ImagesThe Australian dollar has been ‘grappling’ with higher US bond yields.
  • The Australian dollar continues to languish at multi-year lows against the greenback.
  • On Sunday, China’s central bank announced that it will cut the required reserve ratio (RRR) by 100 basis points for some Chinese lenders from October 15.
  • Chinese financial markets will reopen after a week-long holiday and will likely dictate the Aussie dollar’s direction.

The Australian dollar continues to languish at multi-year lows against the greenback, showing little reaction to news that Chinese policymakers have moved to bolster economic activity over the weekend.

Here’s the scoreboard at 7.40am in Sydney.

AUD/USD 0.7052 , 0.0001 , 0.01%
AUD/JPY 80.24 , 0.06 , 0.07%
AUD/CNH 4.8673 , 0.0057 , 0.12%
AUD/EUR 0.6119 , -0.0003 , -0.05%
AUD/GBP 0.5372 , -0.0006 , -0.11%
AUD/NZD 1.0944 , 0.0019 , 0.17%
AUD/CAD 0.9132 , 0.0011 , 0.12%

In early Asian trade the AUD/USD buys .7052, showing little reaction to an announcement from China’s central bank, the People’s Bank of China (PBoC), that it will cut the required reserve ratio (RRR) by 100 basis points for some Chinese lenders from October 15, freeing up 1.2 trillion yuan in cash to support lending and activity in the Chinese economy.

The move, coming less than two weeks after the US Federal Reserve increased its policy rate for the eighth time in the current tightening cycle, underscores the divergence in monetary policy settings in the world’s largest economies in 2018, and has resulted in a modest depreciation in offshore traded yuan in early trade.

Prior to the PBoC decision on Sunday, the AUD/USD closed last week at .7051, the weakest level since February 2016.

As had been the case in early October, the downward pressure on the Aussie reflected continued gains in US bond yields which hit fresh multi-year highs in the wake of the US non-farm payrolls report for September released on Friday.

While total payrolls growth undershot expectations during the month, large upward revisions to prior payrolls growth, along with a decline in the US unemployment rate to near-50 year lows and continued solid growth in average hourly wages, was enough to push benchmark 10-year US government yields to fresh cyclical highs, said Ray Attrill, Head of FX Strategy at the National Australia Bank.

“Friday‚Äôs payrolls report did nothing to arrest the rise in Treasury yields and where 10s came within kissing distance of 3.25% for a 17 basis point rise on the week,” Attrill said.

“Upward revisions to July and August payrolls of 87,000 more than offset the headline miss of 134,000 and the unemployment rate fell to its lowest level since the Vietnam War; December 1969 to be precise.”

The lift in US yields continued to hurt US stocks which fell heavily for a second consecutive session. That in turn weighed on risk assets — including the Australian dollar — which fell to as low as .7043 against the greenback before rebounding marginally into the close.

Investing.comAUD/USD Hourly Chart

Turning to the session ahead, it will be the return of Chinese financial markets following a week-long holiday that appears the most likely catalyst to dictate what direction the Aussie dollar will take.

In particular, in the wake of the modest depreciation in the offshore traded yuan to the PBoC’s RRR cut in early trade, the performance of the onshore traded yuan, or CNY, will be highly influential on the Aussie and emerging market currencies across the region.

The PBoC will announce its daily USD/CNY fixing level shortly after 12.15pm AEDT.

Outside of the reopening of Chinese financial markets from midday AEDT, the data calendar is relatively quiet on Monday.

In Australia, ANZ Bank will release its monthly job ads series at 11.30am AEST. That will be followed a hour later by the latest China services PMI from Caixin-IHS Markit.

Later in the session, other highlights include German industrial output and Eurozone investor sentiment.

Notably, US bond markets will be closed for the Columbus Day holiday. US stocks, however, will continue to trade. Japanese markets will also be offline for a public holiday.

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