- The Australian dollar rallied hard on Friday, supported by a surge in crude oil prices and modest weakness in the greenback.
- Crude prices rallied as an increase in OPEC production levels in July was less than some had earlier feared. The US dollar was also undermined by a soft US manufacturing PMI report for June.
- China cut its reserve requirement ratio for lenders on Sunday. However, trade tensions between the United States and other major trading nations continue to escalate.
The Australian dollar rallied hard on Friday, supported by a surge in crude oil prices and modest weakness in the greenback.
Here’s the scoreboard as at 8am in Sydney on Monday.
AUD/USD 0.7440 , 0.0001 , 0.01%
AUD/JPY 81.77 , -0.04 , -0.05%
AUD/CNH 4.8453 , 0.004 , 0.08%
AUD/EUR 0.6376 , -0.0003 , -0.05%
AUD/GBP 0.5605 , 0 , 0.00%
AUD/NZD 1.0759 , -0.0011 , -0.10%
AUD/CAD 0.9871 , 0.0009 , 0.09%
And here’s a hourly chart of the AUD/USD, showing the price action seen over the past few sessions.
After falling to one-year lows earlier in the week, the AUD/USD jumped on Friday following OPEC’s decision to increase daily production levels by one million barrels per day from July.
Despite adding to supply, the crude oil price rallied strongly, helping commodity-linked currencies, including the Aussie, to push higher.
“The deal did not specify which countries would increase output and by how much,” said Rodrigo Catril, Senior FX Strategist at the National Australia Bank.
“On Saturday the deal was ratified by non-OPEC nations and again no details were given on how the increase in production would be split between OPEC and OPEC allies.
“As the increase in oil output is meant to be shared by all members and OPEC’s allies, and many of them at this stage are unable to increase their current level of production, in practical terms the agreement is expected to result in an increase of 600,000 to 700,000 barrels a day.”
That final point helps explain the surge in crude prices on Friday.
Along with strength in commodity prices, the Aussie was also helped by modest US dollar weakness on the back of soft US economic data and continued escalation in trade tensions between the United States and Europe.
“US manufacturing PMI fell 1.8 points to a weaker than expected 54.6, its lowest level this year,” said analysts at Westpac Bank. “The softer read comes after the surprisingly weak June Philly Fed survey, pointing to a loss of momentum in US manufacturing in June.”
In contrast, the Eurozone composite PMI — including both manufacturing and services activity levels — improved in June, helping the euro gain against the greenback.
That acted to weaken the US dollar index, contributing to the Aussie dollar’s gains.
News that speculative short positions in the Australian dollar increased last week, adding to short-covering risks should the Aussie continue to rally, may have also helped to contributed to the buying momentum see on Friday.
After its crude-linked gains on Friday, whether the upside momentum in the Aussie can continue today will largely be determined by sentiment and news headlines relating to global trade.
On Friday, US President Donald Trump suggested that he may place 20% tariffs on all European car imports entering the United States.
Based on the Tariffs and Trade Barriers long placed on the U.S. & its great companies and workers by the European Union, if these Tariffs and Barriers are not soon broken down and removed, we will be placing a 20% Tariff on all of their cars coming into the U.S. Build them here!
— Donald J. Trump (@realDonaldTrump) June 23, 2018
Trump followed that Tweet up with another this morning, seemingly amplifying trade war fears.
The United States is insisting that all countries that have placed artificial Trade Barriers and Tariffs on goods going into their country, remove those Barriers & Tariffs or be met with more than Reciprocity by the U.S.A. Trade must be fair and no longer a one way street!
— Donald J. Trump (@realDonaldTrump) June 24, 2018
The European Union has already stated that it will respond to any US move to raise tariffs, according to a senior European Commission official.
Despite escalating trade tensions, news that China cut the reserve requirement ratio for Chinese lenders on Sunday — releasing around 700 billion yuan in liquidity into China’s financial system — may help to bolster investor confidence across the Asia region today.
Outside of geopolitical headlines, the data calendar is slow on Monday.
There’s no major releases scheduled in Asia with German business confidence along and US new home sales the headline acts in the second half of the session.
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