The Australian dollar recovers after plunging to the lowest level in a decade

  • The Australian dollar tumbled to the lowest level since the GFC on Thursday before recovering towards the close.
  • The daily trading range for the AUD/USD was the largest since the UK Brexit referendum in June 2016.
  • Soft US economic data and dovish remarks from a leading Fed official saw US treasury yields fall sharply, weakening the greenback against all of the major crosses, including the AUD.
  • The economic data calendar is busy on Friday, headlined by the US non-farm payrolls report for December.

The Australian dollar endured a wild session on Thursday, plunging to the lowest level since the GFC in early trade before recovering towards the close.

Here’s the scoreboard at 9am in Sydney on Friday.

AUD/USD 0.7004 , 0.002 , 0.29%
AUD/JPY 75.38 , -0.65 , -0.85%
AUD/CNH 4.8185 , 0.0143 , 0.30%
AUD/EUR 0.6147 , -0.0009 , -0.15%
AUD/GBP 0.5541 , 0.0003 , 0.05%
AUD/NZD 1.0462 , -0.0029 , -0.28%
AUD/CAD 0.9445 , -0.0041 , -0.43%

After closing below the .7000 level for the first time since early 2016 on Wednesday, the AUD/USD plunged in Asian trade, sliding from just below .7000 to as low as .6743 in a matter of seconds, according to data from Thomson Reuters.

“A precipitous decline in USD/JPY in the twilight hours between the New York and Asian session dominated talk in the marketplace today,” said Neil Mellor, Senior Currency Strategist at BNY Mellon.

“The USD/JPY fell by 4.4% soon after Apple depicted a fairly downbeat outlook for 2019, whilst the JPY jumped by almost 8% against the AUD and by around 10% against the TRY with stop-tripping exacerbating the moves in both pairs.”

Pepperstone Chief Market Strategist Chris Weston said the move was partially due to extremely thin market liquidity.

“We saw a liquidity event in a period labelled the ‘twilight zone’,” Weston said.

“This is effectively the period between the close of the US markets and the open of Asia, where liquidity can drop away. Making things worse, Tokyo markets were closed.”

The move saw the AUD/USD fall to the lowest level since March 2009, while the AUD/JPY hit lows not seen since October 2011.

To provide some context as to how massive the move in the AUD/USD was on Thursday, at 276 pips, the daily trading range was the largest since the UK Brexit referendum back in June 2016.

However, the AUD/USD recovered those losses in the second half of the session, helped in part by another steep decline in US bond yields, soft US economic data and dovish commentary from a leading US Federal Reserve official.

AUD/USD Hourly Chart.

“The US manufacturing ISM printed at 54.1, well below the 57.5 consensus and November’s 59.3, driven by the new orders subindex which slumped to 51.1 from 62.1,” said Ray Attrill, Head of FX Strategy at the National Australia Bank.

“The fall in the main index closely mirrors the sharp weakness recently seen in the equivalent China PMI import sub-index.

“This is more proof, if needed, that President Trump’s trade actions against China are now hurting the US as much as they are China… [providing another] reason to think a Sino-US trade deal is in the offing in coming weeks.”

The soft manufacturing report saw US 2 and 10-year bond yields side by 10 and 8 basis points respectively, heaping pressure on the US dollar in the latter parts of the session.

Dovish remarks from Dallas Fed President Robert Kaplan also did little to help the greenback’s cause.

“There are three big issues that I see reflected in the markets that are consistent with what I’m seeing in the economy,” Kaplan said in an interview on Bloomberg TV.

“Global growth decelerating.., interest-sensitive industries are showing weakness… and financial conditions have tightened and credit spreads have widened.

“My own view is we shouldn’t take any further action on interest rates until these issues are resolved for better or for worse… so I would be an advocate of taking no action during the first couple of quarters of this year.”

Combined, that helped the AUD/USD move back above the .7000 level in the latter parts of the session.

Turning to the day ahead, all of the major scheduled events arrive offshore, headlined by the release of the US non-farm payrolls report for December at 12.30am AEDT.

Before that report hits, markets will also receive PMI data from China, Japan and Europe, Eurozone CPI along with Canadian unemployment.