- The Australian dollar got smoked for second consecutive session on Thursday.
- Geopolitics, plunging stock and commodity prices, a weaker Chinese yuan and increased volatility ensured a torrid day for the Aussie.
- Chinese financial markets will likely dictate sentiment in the first half of Friday’s trading session. Towards the close, the US non-farm payrolls report will be the primary area of focus.
The Australian dollar is still getting smoked, falling heavily for a second nonconsecutive session on Thursday.
However, rather than being driven by iffy Australian economic data and remarks from a Canadian central banker, as was the case on Wednesday, the selloff on this occasion was sparked by heightened geopolitical risks, resulting in another ugly day for risk assets.
Here’s the scoreboard at 8am in Sydney on Friday.
AUD/USD 0.7235 , -0.0033 , -0.45%
AUD/JPY 81.55 , -0.72 , -0.88%
AUD/CNH 4.9775 , -0.0067 , -0.13%
AUD/EUR 0.6357 , -0.0049 , -0.76%
AUD/GBP 0.5659 , -0.0048 , -0.84%
AUD/NZD 1.0514 , -0.0018 , -0.17%
AUD/CAD 0.9674 , -0.0033 , -0.34%
Having opened the day at .7273, the Aussie’s slide began midway through the session as news that a senior Chinese business executive had been arrested in Canada for allegedly breaching newly-implemented US economic sanctions on Iran.
With markets highly-sensitive to any trade-related developments at present, the news led to substantial losses across stocks, commodities and emerging market currencies during the session, particularly in Europe and Asia.
“The widespread falls reflect in part concerns about the durability of the US China trade truce,” said Joseph Capurso, Senior Currency Strategist at the Commonwealth Bank.
“Canada’s arrest of Huawei’s chief financial officer following a US extradition request reinforces our view that a speedy resolution to US China trade tensions is unlikely in the near term.”
Along with heightened geopolitical risks, the commodity-linked Aussie was not helped by a plunge in crude oil prices due to OPEC and its allies failing to reach agreement on a potential production cut at its meeting in Vienna.
OPEC “plus”, as it is known, will have another go today at securing a production agreement. Iron ore prices were also hit hard, further diminishing the Aussie’s appeal.
At the margin, a speech from RBA Deputy Governor Guy Debelle — in which he emphasised the bank still has policy flexibility to support economic activity if necessary — may have also contributed to the Aussie’s weakness.
“Debelle said the RBA is closely watching house prices and lending activity for any fallout to the broader economy,” said Joseph Capurso, Senior Currency Strategist at the Commonwealth Bank.
“Debelle reiterated the RBA’s ‘house view’ that ‘the next move in monetary policy is more likely up than down, though it is some way off.
“[However], Debelle warned again that ‘there is still scope for further reductions in the policy rate’ or quantitative easing in the event of a crisis.”
Essentially, Debelle told markets that while the bank thinks the next move in the cash rate is higher, it will not hesitate to step in should policy support be required. Given the RBA’s focus on financial stability in recent years, some had adopted the view that it would not offer policy support come hell or high water.
That’s clearly not the case.
Along with renewed weakness in the offshore-traded yuan, or CNH, the combination of geopolitics, plunging commodity and stock prices and increased volatility saw the AUD/USD slip to as low as .7193, the weakest level since mid-November. It currently trades at .7235, helped by a late rebound in US stocks.
The Aussie’s falls were even steeper against the Japanese yen, euro and British pound, reflecting a combination of heightened risk aversion, softish US economic data and speculation surrounding Brexit.
Turning to the day ahead, geopolitics and headlines look set to remain in the driving seat in Asia with no major economic data releases scheduled until the second half of the session.
Given the absence major data regionally, the performance of Chinese financial markets, particularly the yuan, will likely be influential on the Aussie dollar.
Later in the day, the undisputed highlight will be the release of US non-farm payrolls for November at 12.30am AEDT.
Markets are looking for payrolls to increase by 205,000 leaving the unemployment rate steady at 3.7%. Average hourly earnings are seen increasing by 0.3% over the month, and by 3.1% over the year. The latter figure will be important given the implications for domestic inflation and household spending.
While the payrolls release will dominate, markets will also receive separate data Canadian unemployment, Eurozone GDP and employment growth, German industrial production along with consumer confidence, consumer credit and wholesale inventories from the United States.
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