Wider Trade Surplus and Weaker US Dollar Lift Australian Dollar

• Higher exports and lower imports pushed Australia’s trade surplus sharply wider to A$2,826M in September.
• Fears of political deadlock following a Democratic sweep in the midterm elections weighed on the US Dollar.
• Further losses for the Greenback are constrained by robust US economic figures, which underpin the Federal Reserve’s hawkish position.

Australia’s latest trade balance figures helped the Australian Dollar (AUD) edge higher, supporting a second successive day of gains for AUD/USD. The pair is trading near 0.7010 in Thursday’s Asian session.

September’s Australian trade surplus increased sharply month on month to A$2,826 million from a revised A$185 million in the preceding release, which had initially been reported as A$495 million. Exports climbed 2.3% in September after August’s increase was revised to 3.1% from an initial 3.7%. Imports, by contrast, declined 3.3%, reversing the previous month’s growth of a revised 6.2%, initially reported as 5.8%.

Widespread US Dollar (USD) weakness provided an additional lift to AUD/USD. Following a Democratic sweep in the midterm elections that secured control of both houses of Congress, concerns about possible political deadlock in Washington prompted heavy selling of the Greenback. The election result also fuelled market expectations that the Middle East conflict would end. Oil prices consequently fell sharply, placing the USD under further pressure.

Robust domestic economic figures could nevertheless limit the US Dollar’s losses. The ADP report showed an 86,000 increase in private-sector employment in October, above the 69,000 expected. September’s reading, however, was revised down from 90,000 to 86,000. At the same time, the ISM Services PMI eased from 54.9 to 54.5, marginally missing the 54.8 forecast while remaining comfortably in expansionary territory.

With these firm economic readings giving the Federal Reserve (Fed) scope to retain its hawkish policy stance, the central bank can continue its efforts to bring inflation back to its 2% target. The CME FedWatch Tool indicates that markets currently assign an 80% probability to a further rate rise in December. Attention now shifts to forthcoming US data, with weekly Initial Jobless Claims due on Thursday ahead of Friday’s Nonfarm Payrolls (NFP) report.

USD eases as stronger post-election risk appetite supports high-beta FX

A clear improvement in risk sentiment is evident in moves across the major currencies, according to Scotiabank analysts, who report that the “USD is weakening broadly in response to Tuesday’s US midterm election results,”. In their assessment, relative performance across G10 FX “is suggestive of risk appetite,” with the Mexican Peso out in front, recording “a near-1% gain on the day”. The NZD, NOK and AUD are “up between 0.6-0.7%,” while the EUR and GBP also “show relatively sizeable 0.5% rallies from Tuesday’s close.”