Australian Dollar Gains as US Dollar Softens and Trade Surplus Expands

• Higher exports and lower imports drove a substantial widening in Australia's September trade surplus to A$2,826M.
• Political deadlock concerns weighed on the US Dollar after Democrats swept the midterm elections.
• The Greenback's losses remain constrained as robust US economic readings underpin the Federal Reserve's hawkish policy stance.

Gains in the Australian Dollar (AUD) helped AUD/USD advance for a second straight day, with the pair trading near 0.7010 in Thursday's Asian session. The AUD edged up after the publication of Australia's latest Trade Balance report.

A marked month-on-month widening took Australia's trade surplus to A$2,826 million in September, compared with the previous reading's revised A$185 million surplus (initially reported as A$495 million). Exports increased by 2.3% in September after August's upwardly revised 3.1% rise (initially 3.7%). Imports, by contrast, declined by 3.3%, reversing the previous month's revised 6.2% increase (initially 5.8%).

Broad US Dollar (USD) weakness lent additional support to AUD/USD. Heavy selling hit the Greenback after the Democrats' midterm election sweep gave them control of both houses of Congress, fuelling fears of a possible political deadlock in Washington. The election result also prompted market expectations that the Middle East conflict would end. Oil prices consequently fell sharply, putting the USD under further pressure.

Resilient domestic economic readings could, however, contain the US Dollar's losses despite these pressures. The ADP report showed that private-sector employment added 86,000 jobs in October, exceeding expectations of 69,000. September's reading, however, was lowered to 86,000 from 90,000. 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 it room to retain a hawkish stance, the Federal Reserve (Fed) can continue its efforts to bring inflation back to the 2% target. Markets currently assign an 80% probability to a further rate hike in December, according to the CME FedWatch Tool. Attention is now shifting to forthcoming US data, with weekly Initial Jobless Claims due on Thursday and the Nonfarm Payrolls (NFP) report scheduled for Friday.

Is post-election risk appetite lifting high-beta FX as USD weakens?

Improved risk sentiment is evident in movements across 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 with “a near-1% gain on the day”. The NZD, NOK and AUD are “up between 0.6-0.7%,” and even the EUR and GBP “show relatively sizeable 0.5% rallies from Tuesday’s close.”