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The Australian Dollar rides higher through midweek trade, helped by a more assured stock market performance.
Global equity gains are helping the Australian Dollar outperform its major peers through the midweek session, although technical considerations could limit the advance.
Stocks fell sharply last Friday but have steadied this week amidst a steady flow of strong earnings by firms in North America and Europe, which is giving a boost to 'high beta' currencies like the New Zealand and Australian Dollars.
More broadly, markets are looking forward to a period of fewer tariff headlines and the prospect of a series of U.S. Federal Reserve interest rate cuts, starting in September.
"Equity markets appear to be mostly shrugging off the developing risks, as they’ve turned positive again, with U.S. futures rising modestly after Tuesday’s losses," says Raffi Boyadjian, Lead Market Analyst at Trading Point.
AUD typically rises when global stocks rise, often by a larger magnitude than other currencies. This is why it is known as a 'high beta' currency, meaning its outlook could well be determined by developments in the U.S.
"While we expected near-term volatility as the impact of US tariffs feeds through to the economy, we also believe the bull market is intact and expect further gains over the next year," says Mark Haefele, Global Wealth Management Chief Investment Officer at UBS Switzerland AG.
UBS currency strategists say AUD remains amongst their top picks in the G10 space right now.
Although sentiment is helping the Aussie rebound from recent losses, the currency continues to contend with resistance at some key levels that are likely to limit gains much further:
The Pound to Australian Dollar exchange rate (GBP/AUD) is lower by a third of a per cent at 2.0485 at the time of writing Wednesday, which brings it back to a key support line that has halted previous declines on a number of occassions during the past two weeks.
Above: GBP/AUD at daily intervals.
The Australian Dollar-U.S. Dollar rate (AUD/USD) rises to 0.6495 at the time of writing, and we will be looking to see if it can sustain levels above 0.65. Deep market analysis of option structures shows there are significant offers layered pre-0.65, which has thus far kept a lid on AUD in August.
There are also big 0.6500 option expiries on Thursday and Friday.
We would need to see AUD overcome these levels for a broader rally across the AUD spectrum, which would likely tip GBP/AUD below 2.0500.
Above: AUD rises into layers of option market selling interest.
Midweek's positive price action comes ahead of the RBA's August policy decision, where a cut is expected. As it is 'in the price' the currency shouldn't react. Instead, as always, how it moves will be determined by how the central bank primes the market for future moves.
Ahead of this event risk, analysts at Convera, the global payments firm, say the currency looks attractively valued at current levels, which speaks of the potential for a valuation-lead round of appreciation. This would be particularly likely in a low-volatility market environment.
"Persistent AUD undervaluation signals mean reversion potential, with the currency trading 2.0% and 8.8% below its one-year and five-year averages respectively against GBP, despite Australia's robust domestic fundamentals outpacing UK economic performance," says a monthly currency briefing from Convera.