Australian, New Zealand Dollars May Extend Gains in Risk-On Trade

Talking Points:

• Euro lower amid correction in anti-USD flows, Aussie Dollar holds up
• Lull in top-tier economic data flow may put sentiment trends into focus
• Risk-on mood seen ahead but US politics still a potent volatility threat

The Euro corrected lower in Asian trade. The move played out inversely of a rebound in front-end US Treasury bond yields, suggesting weakness reflected a correction in anti-USD flows triggered as the unwinding of the so-called “Trump trade” dealt another blow to Fed interest rate hike prospects.

The Australian Dollar continued to push higher however, with prices seemingly still reveling in the prior day’s heroics, which also seemed to follow from the greenback’s woes. The Aussie’s resilience may reflect its yield supremacy, a benefit the Euro cannot claim. Tellingly, the New Zealand Dollar also rose.

From here, a tame offering on the European and US economic data fronts may put sentiment trends at the forefront. FTSE 100 and S&P 500 futures are pointing cautiously higher, hinting at a broadly upbeat mood. This suggests overnight dynamics – capital flowing from lower- to higher-yielding FX – may continue.

News-flow from Washington DC remains a potential source of knee-jerk volatility however. Indeed, the latest healthcare reform failure demonstrated the markets’ continued sensitivity outcomes tarnishing the post-US election narrative.

See our forecasts to find out what will drive major currency trends in the next three months!

Asia Session

European Session

** All times listed in GMT. See the full DailyFX economic calendar here.

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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