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The Australian dollar goes hard into reverse as risk assets crumble

David Scutt
  • The Australian dollar went hard into reverse in late trade on Tuesday, unwinding earlier gains for a second consecutive session.
  • Concerns about the outlook for US economic growth and scepticim over the trade truce between the US and China saw risk assets crumble, weighing on the Aussie.
  • Australia's Q3 GDP report will be released today. US bond and stock markets will be closed to mark the passing of former US President George Bush Senior.

The Australian dollar went hard into reverse in late trade on Tuesday as investor risk appetite took a turn for the worse.

Here's the scoreboard at 8.10am in Sydney on Wednesday.

AUD/USD 0.7339 , -0.0016 , -0.22%
AUD/JPY 82.78 , -0.81 , -0.97%
AUD/CNH 5.0276 , -0.0284 , -0.56%
AUD/EUR 0.6471 , -0.0006 , -0.09%
AUD/GBP 0.5771 , -0.0009 , -0.16%
AUD/NZD 1.0586 , -0.0027 , -0.25%
AUD/CAD 0.9722 , 0.0013 , 0.13%

After opening the Tuesday's session at .7355, the AUD/USD soared to as high as .7393 in early European trade, mirroring a similar move in the Chinese yuan which jumped to fresh three-month highs.

Scant attention was paid to the RBA's December monetary policy statement despite widespread recognition that the tone from the bank was not as optimistic as that seen just a month ago.

However, just when it looked like the Aussie would bust above the 74 cent level, it began to reverse hard as North American markets opened, reflecting a noticeable deterioration in investor risk appetite that was in complete contrast to the enthusiasm seen to start the week.

Concerns about a significant slowdown in the US economy in the years ahead, assisted in part by renewed scepticism over the temporary trade truce agreed by the US and China last weekend, was cited as the catalyst behind the move.

The spread between US 10 and 2-year government bond yields narrowed to less than 10 basis points, the lowest level since before the onset of the GFC. In the past, whenever the spread between longer and shorter-dated bond yields has turned negative, it has usually been followed by a US recession in the period ahead.

Partially reflecting concerns about a potential sharp US growth slowdown, or worse, scepticism over the the trade truce between the US and China leading to a long-lasting solution also intensified during the session.

"It’s not just about the yield curve with doubts about whether the Trump-Xi handshake and agreed 90-day moratorium on further tariff action was anything more than just that," said Ray Attrill, Head of FX Strategy at the National Australia Bank.

"For one, the US administration has already had to row back on Trump’s twitter claims that China ahead agreed to reduce tariffs on US auto imports while officials on the Chinese side have been notably mum on what was agreed last Sunday."

Trump, himself, did little to appease investor concerns, describing himself as a "tariff man" in a Twitter post.

Despite concerns about the US economy based on the signals coming from the yield curve, the US dollar actually rallied during the session, helped by safe-haven flows and comments from John Williams, New York Fed President, who said that he sees "further gradual rate hikes over the next year or so".

Williams is seen to be a policy centrist, and closely aligned to US Fed Chair Jerome Powell.

With stocks down heavily and volatility lifting sharply, it has seen the AUD/USD fall sharply to sit at 0.7339 in late trade on Tuesday.

While it may well be overlooked given the price action seen over the past 24 hours, the economic data calendar is busy today, both in Australia and abroad.

Domestically, the main highlight comes from the release of Australia's Q3 GDP report at 11.30am AEDT. Markets are looking for a quarterly increase of 0.6%, seeing the annual growth rate ease a touch to 3.3%.

Components linked to the household sector may well prove to be more influential on the market reaction than the actual headline figure itself.

This 10-second guide has more on what to look out for in the report.

Before the GDP report arrives, services PMI data from the Ai Group will also arrive at 8.30am AEDT.

Internationally, services PMI reports will dominate the session with figures from Japan, China, the UK and Europe all scheduled for release.

The Bank of Canada will also announce its December interest rate decision -- no move is universally expected -- while ECB President Mario Draghi is also scheduled to speak.

The Fed will also release its latest Beige Book on economic conditions.

of note, US bond and stock markets will be closed to mark the passing of former US President George Bush Senior.