The Australian dollar ended Tuesday trade almost exactly where it started, initially rising above 75 cents in early Europe before unwinding those gains during the second half of the session.
It was a topsy-turvy day, and one that was largely dictated by a recovery in the US dollar, says Elias Haddad, senior currency strategist at the Commonwealth Bank.
“The USD and US 10-year Treasury yields recovered overnight supported by the Trump administration’s budget plan,” he said in a note released on Wednesday morning.
“The USD rallied and US 10-year Treasury yields rose by roughly 5 basis points to 2.29% because Trump’s budget proposal includes an infrastructure plan to support US$1 trillion — or about 6% of GDP — in private/public infrastructure investment.”
Haddad says that if the budget is approved by US Congress, it’s likely to boost US economic growth, potentially forcing the Fed to increase the pace of interest rate hikes which in turn would help bolster the USD.
However, he admits that the budget in its current form is unlikely to be approved by Congress, noting that it is based on ambitious US economic growth assumptions.
That suggests that profit-taking after several days of losses may have spurred the US dollar’s recovery, placing renewed downward pressure on the Aussie as a consequence. The arrival of the US Fed’s May FOMC meeting minutes later today may have been a factor that underpinned the move.
While the Aussie closed almost unchanged against the US dollar, it gained against the likes of the euro, yen and pound — again possibly reflecting profit-taking from investors after several days of weakness.
Here’s the scoreboard as at 8am AEST.
AUD/USD 0.7476 , 0.0002 , 0.03%
AUD/JPY 83.57 , 0.03 , 0.04%
AUD/CNH 5.1434 , 0.0023 , 0.04%
AUD/EUR 0.6683 , 0.0001 , 0.01%
AUD/GBP 0.5767 , 0.0003 , 0.05%
AUD/NZD 1.0659 , 0.0003 , 0.03%
Turning to Wednesday trade in Asia, there’s a smattering of economic data releases scheduled, although none appears likely to generate any significant volatility in the Aussie.
In Australia, the first of Australia’s Q1 GDP inputs will arrive with the release of construction work done at 11.30am AEST.
The median market forecast is centred around a decline of 0.5% for the quarter, although Haddad suggests that an upside surprise could be on the cards.
“Australia’s Q1 construction data likely picked-up at a quarterly pace of 0.5% as the drag from declining mining investment wanes reflecting a lift in residential investment,” he says.
“This will offer AUD some intra-day support, particularly on crosses like the euro and UK pound.”
That may well eventuate, although this report in the past has failed to generate much movement in the Aussie. One suspects that a large surprise will be required to do so on this occasion.
Besides the construction report, markets will also receive second-tier releases such as skilled vacancies and the Westpac-MI leading index. Neither will move the Aussie.
Given the lack of market-moving events on the calendar — not only in Australia but across the Asian region — suggests that movements in US bond yields, the USD/JPY and Chinese commodity futures may be influential on the Aussie today.
Later in the session, the Fed will the release the minutes of its May FOMC meeting at 4am AEST.
Rodrigo Catril, currency strategist at the National Australia Bank, says that markets will be particularly sensitive to any commentary on the inflation outlook.
“A June hike still looks like the base case scenario, but if there are any signs of doubts over the expected upward path on inflation this view may be challenged,” he says.
Before the arrival of the minutes, markets will receive existing home sales, house prices and revised building permits figures from the US while in Canada the Bank of Canada will release its May monetary policy decision. No change in policy is expected.
ECB president Mario Draghi is also scheduled to speak.
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