The Australian dollar staged an unlikely rally overnight

Steve Munday/Getty Images

Pushing aside a near 3.5% plunge in the iron ore price, the Australian dollar rallied hard overnight, pushing as high as .7249 before succumbing to profit taking late in US trade. As at 8.30am AEDT, the AUD/USD currently buys .7229, up on Monday’s opening level of .7191.

AUD/USD 5-minute chart Source:

According to David de Garis, senior economist at the NAB, the catalyst for the rally strength in the Chinese renminbi (CNH) following the IMF’s decision to include the currency in its special drawing rights (SDR) basket from October next year.

“For overnight FX moves, the broad rally in high-yielding currencies seems to have been sparked by a sharp gain in the CNH after the CNH-CNY spread blew past 600pts on Friday and early yesterday morning, the AUD making headway through the session overnight, despite another decline in iron ore,” wrote de Garis in his morning note.

Despite the sharp rally in the Aussie, de Garis described the IMF’s decision as “entirely expected”, suggesting the impact on the Aussie may well be short lived.

Looking ahead to Tuesday’s trading session, markets will receive a slew of domestic and regional data along with the RBA’s December monetary policy meeting.

On the domestic front, the weekly ANZ-Roy Morgan consumer confidence index and AIG manufacturing PMI report for November will be released at 9.30am AEDT with the latest CoreLogic RP Data house price index following soon after at 10am AEDT. Beyond that, the ABS will release its October building approvals report along with Q3 net exports, current account and government expenditure figures, direct GDP inputs for tomorrow’s Q3 GDP report. All four will be released at 11.30am AEDT.

Later this afternoon, the RBA will also release it latest commodity price index for November, something that is likely to reveal another significant decline following a steep in iron ore prices during the month.

From a regional perspective, markets will also digest manufacturing PMI reports from the likes of China (12pm and 12.45pm AEDT), Japan (12.35pm AEDT) and South Korea (12.20pm AEDT). Elsewhere New Zealand Q3 terms of trade (8.45am AEDT), South Korean CPI (10am AEDT) and Japanese Q3 business capital expenditure (10.50am AEDT) will also be on the radar.

Once the data deluge has hit, all attention will be on the RBA’s December monetary policy decision released at 2.30pm AEDT. While interest rates are almost certain to be left on hold at 2.0%, the wording of the accompanying monetary policy statement will be heavily scrutinised.

De Garis expects the bank to maintain its weak easing bias, something it inserted into its November statement, although he suggests the strength of the Australian dollar at a time of continued commodity price weakness may see the bank alter its language on the current level of the currency.

“In today‚Äôs statement, we look for the bank to recognise signs of moderating Sydney and Melbourne house prices, the AUD has been relatively steady despite further commodity price softness, especially iron ore but that the domestic economy continues to show signs of emerging growth.”

“We look for the Bank to retain its weak easing bias, NAB expecting the cash rate to remain on hold though next year.”

De Garis’ view is similar to that echoed by TD and ANZ, suggesting that a change in language may have already been factored into market pricing. Should no change in language ensue, it’s likely to be supportive of the Aussie in the near-term.

Here’s the current Aussie dollar scoreboard.

  • AUD/USD 0.7229 , 0.0037 , 0.51%
  • AUD/JPY 88.97 , 0.65 , 0.74%
  • AUD/CNY 4.6252 , 0.0269 , 0.58%
  • AUD/EUR 0.6840 , 0.0051 , 0.75%
  • AUD/GBP 0.4801 , 0.002 , 0.42%
  • AUD/NZD 1.0970 , -0.0022 , -0.20%

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