The Australian dollar rally just hit an air pocket

Reversal. Yuli Seperi/Getty Images
  • The Australian dollar gave up earlier gains on Friday, weighed down by higher US bond yields and renewed doubts over the prospect of a trade deal between the US and China being struck.
  • The British pound is surging this morning on speculation of a breakthrough on Brexit negotiations.
  • There’s a raft of services PMI reports released across the world today.

The Australian dollar has opened the new trading week below .7200 against the greenback, pulling back from a one-month high struck on Friday as a combination of higher US bond yields and renewed doubts over a near-term trade deal being struck between the United States and China weighed upon the Aussie.

Here’s the scoreboard at 8am in Sydney on Monday.

AUD/USD 0.7186 , -0.0011 , -0.15%
AUD/JPY 81.32 , -0.68 , -0.83%
AUD/CNH 4.9582 , -0.0414 , -0.83%
AUD/EUR 0.6302 , -0.0057 , -0.90%
AUD/GBP 0.5509 , -0.0056 , -1.01%
AUD/NZD 1.0829 , -0.0043 , -0.40%
AUD/CAD 0.9427 , -0.0001 , -0.01%

Having recorded its largest one-day percentage gain against the greenback since March 2017 a session earlier, the AUD/USD went on with that move in Asian trade on Friday, surging to as high as .7260, a level not seen since September 27.

The catalyst was unconfirmed reports that US President Donald Trump had asked key officials to begin drafting potential terms of a trade agreement with China ahead of a meeting at the G20 meeting in Argentina at the end of November.

The news saw the AUD/USD break convincingly out of the downtrend it had been stuck in since late January this year, extending its rally over the past week to 3.4%.

However, that move quickly reversed in the second half of the session as a combination of a strong US jobs report for October and renewed doubts about the prospect of a near-term trade deal between China and the US saw the Aussie slip back below .7200, a level it remains entrenched below this morning.

“Friday’s US payrolls report exceeded expectations only in respect of the headline non-farm payrolls print with the unemployment rate unchanged at 3.7% as expected thanks to a 0.2% rise in the about participation rate, while average hourly earnings printed at 0.2% as expected but which lifted the annual rate to 3.1%, the first time above 3% since 2009,” said Ray Attrill, Head of FX Strategy at the National Australia Bank.

“The data prompted a partial reversal of Thursday’s USD fall back and lifted US bond yields by between 5.9 to 8.2 basis points.”

Along with the strong US jobs report, the Aussie was also weighed down by conflicting reports on progress on trade negotiations between the United States and China.

“There’s no mass movement, there’s no huge thing. We’re not on the cusp of a deal,” White House economic adviser Larry Kudlow told CNBC in an interview.

That saw earlier moves unwound, casting doubt as to whether positive statements earlier in the session were simply deigned to help bolster support for the Trump administration ahead of US mid-term elections that will be held on Tuesday.

AUD/USD Hourly Chart

While that saw the Aussie finish marginally lower against the greenback on Friday, it has lost further ground this morning against all of the major crosses, especially the euro and British pound on positive headlines regarding Brexit negotiations.

“The UK Sunday Times reported that senior sources say Teresa May has secured private concessions from Brussels that will allow her to keep the whole of Britain in a customs union, avoiding a hard border in Northern Ireland,” says Attrill at the NAB.

“They expect this may placate ‘remain’ Tories and win over some Labour MPs.”

While that has seen the Aussie fall sharply against the euro and GBP, the Aussie’s broad movements today will likely be determined by the performance of Chinese markets, especially the yuan.

They’ll resume trade at midday AEDT.

On the data front, Australian investors will receive services PMIs from the Ai Group and IHS Markit during the session, along with ANZ’s latest job ads survey and Melbourne Institute inflation gauge for October.

Elsewhere, markets will receive services PMIs from China, Japan the UK and US during the session.

The US report from the ISM, in particular, could prove to be highly influential on currency markets in latter parts of trade.

With US midterm elections held on Tuesday, adjustments to positioning and lower than normal trading volumes may also contribute to skittish market movements over the next couple of days.