Forex Market: AUD/USD rebounds as PBOC lifts yuan fixing by the biggest margin since 2005, fueling risk sentiment

AUD/USD rebounded on Tuesday after the People’s Bank of China (PBOC) lifted the official yuan exchange rate by the biggest margin since 2005, while prompting broad US Dollar selloff.

The official yuan midpoint was set at 6.4760 per dollar, or 1% firmer compared to the previous fixing.

“If the Chinese currency is going up, it’s providing a degree of support for Asian currencies in general, and I suspect that’s why the U.S. dollar is partially reversing the gains that we saw from Wall Street time,” Ray Attrill, head of Forex strategy at National Australia Bank, was quoted as saying by Reuters.

“It’s a very big move by any historical yardstick, and I don’t think you can ignore that.”

Yesterday the greenback received certain support due to uncertainty surrounding the US runoff elections in Georgia as well as concerns over rising new coronavirus infections, which triggered a retreat in US equities.

The Aussie Dollar, a liquid proxy for risk, has benefited both from rising commodity prices and Australia’s success in pandemic containment. Yet, a new outbreak in Sydney remains a source of uncertainty.

“There is still a degree of uncertainty as we enter the year, a degree of hope but a degree of uncertainty,” CommSec economist Craig James said. However, he noted that the country’s broad success in managing the COVID-19 pandemic would probably facilitate a swift economic recovery and drive AUD/USD exchange rate higher to 0.7800.

“We think as we go into 2021 the prospects are very positive (and) the Aussie dollar will be back in favor in a year which will be much more on growth, here in Australia and globally,” James said.

As of 10:12 GMT on Tuesday AUD/USD was gaining 0.75% to trade at 0.7718, while moving within a daily range of 0.7660-0.7725. Last week the pair climbed as high as 0.7742, or its strongest level since April 19th 2018 (0.7813). The major pair advanced for a second straight month in December, by 4.89%, or the biggest monthly gain since April 2020.

In terms of economic calendar, today market players will be paying attention to the December data on US manufacturing sector activity by the Institute for Supply Management due out at 17:00 GMT.

Bond Yield Spread

The spread between 2-year Australian and 2-year US bond yields, which reflects the flow of funds in a short term, equaled -5.6 basis points (-0.056%) as of 9:15 GMT on Tuesday, down from -5.3 basis points on January 4th.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 0.7681
R1 – 0.7720
R2 – 0.7780
R3 – 0.7819
R4 – 0.7858

S1 – 0.7622
S2 – 0.7583
S3 – 0.7523
S4 – 0.7464