US-China “Mini” Deal bolsters demand for risk

AUD - Australian Dollar

The Australian dollar maintained its momentum through trade on Friday, edging higher as the US and China agreed a partial trade deal. Risk appetite was bolstered in the wake of the news the two economic superpowers had agreed a “mini” trade agreement, suspending this week’s tariff increases and committing to a larger exchange of agricultural products. Despite failing to address any of the underlying issues that have plagued the trade negotiations to this point, the agreement is a step in the right direction and paves the way for “phase two” of the negotiations. Having edged through 0.68 to touch session and near one-month highs at 0.6809, the AUD corrected lower into the close and opens this morning buying 0.6785 US cents.

Attentions now turn to Tuesday’s RBA minutes and commentary from Deputy Governor of the RBA Guy Debelle for a greater insight into RBA thinking and the decision to cut rates in October, while employment data on due Thursday remains crucial in shaping easing expectations. A soft read could prompt a downward correction with yield curve indicators currently only pricing in a 50% chance of a rate cut come November. Obtaining full employment is a critical goal for the RBA and weakness across employment indicators could increase calls for additional monetary policy action. We continue to watch resistance at 0.68 and 0.6830 with supports in tact at 0.6680.

Key Movers

Safe haven currencies fell through trade on Friday, with the USD, JPY and CHF all forced lower in the wake of the US-China trade agreement. The partial deal between the two economic superpowers bolstered markets appetite for risk as investors optimism a full-scale deal could be reach escalated. As global risk factors eased through last week commodity and emerging market assets found support while the USD marked fresh one-week lows.

Despite the recent uptick in trade optimism there are still significant structural barriers that must be overcome before a complete trade truce is reached. And while this most recent deal is a step in the right direction the underlying structural barriers are unlikely to be resolved in the near term which could weigh on risk appetite and ensure the recent upturn is short lived.

Sterling found support on increased expectations a Brexit deal will be reached. The pound pushed through 1.26 to touch 1.2683. Direction remains binary and tied to Brexit headlines with underlying economic indicators unlikely to have a significant impact on value leading through October and into the October 31 Brexit deadline.

Expected Ranges

AUD/USD: 0.6730 - 0.6830 ▲

AUD/EUR: 0.6080 - 0.6230 ▲

GBP/AUD: 1.8390 - 1.8830 ▲

AUD/NZD: 1.0650 - 1.0750 ▼

AUD/CAD: 0.8950 - 0.9050 ▼