The FX Trader: AUD getting overbaked?

What to know: quick bullets

• The US government is set to re-open, cementing what the market was already expecting earlier this week – it isn’t serving as an immediate catalyst. The incoming data schedule is not yet known and we may never get some of it, as data wasn’t even collected during the month of October in some cases.
• A big liquidity splash incoming into the US economy? We have a US Treasury account that is loaded with funds – over USD 900 billion – and looking ready to draw those down, which will enhance liquidity. Treasury Secretary Bessent was out yesterday talking USD 2,000 stimulus checks to all. This is high velocity money that will go straight into the economy – or will it go to credit card balances (?) – and could put the Fed on watch for a tick up in growth and inflation even if a lot of the incoming data on the non-AI data center economy is looking wobbly at best, and in out-and-out recession at worst. Very interesting talk as well of giving every newborn child USD 1,000 in US stocks that parents can add to – to be granted to the child at age 18 – a sort of Universal Basic Capital rather than just Universal Basic Income. The idea is to fund all of this from tariff revenue based on tariffs that may or may not be legal and the entire setup skirts the power of Congress – this is historic stuff.
• The Aussie (AUD) got another jolt higher on strong jobs data overnight and the latest pump in metals prices and even perhaps CNY strength at the margin helping the currency, although it may be getting to be a bit much as discussed in the AUDNZD chart below – one of this year’s best trenders – a bit ironic when it was rangebound for over a decade, if with some great modest trends during that period.
• Sterling remains a dog, not just on the weak labor market but on concerns that a labor party member may rise to challenge Keir Starmer. Nothing firm on the latter – but with or without this challenge, tough to find any rays of light for sterling. This morning’s Q3 GDP data was slightly negative (missing by 0.1% on the QoQ and YoY numbers at 0.1%/1.3% rexepctively) and the Sep. Manufacturing Production number was ugly at -2.2% YoY vs. -1.7% expected, with the Trade Balance number better than expected at GBP -18.9 billion. EURGBP is testing new highs above 0.8830 and GBPCHF posted its lowest daily close…ever at 1.0478 yesterday, leaving only the Liz Truss mini-budget spike from late 2022 below 1.0200 as the last chart point.
• USDCNH – making waves overnight with big drop relative to normal volatility, especially late in Asian session – could be driving the USD weakness this morning.
• EURCHF – keep an eye on the all time lows coming into view in the low 0.9200’s, an area that has been tested multiple times since the summer of 2024, for whether the SNB wants to put up a fight on a further drop – 0.9206 was the all time intraday low, if the SNB surrenders on a run lower, we could be looking at 0.9000 next.
• The comeback in Scandies was moderated in EURNOK’s case by an ugly sell-off in crude. EURSEK still looks heavy ahead of the big sub-10.90 range lows – incoming German stimulus next year has me liking an eventual move to 10.50 and even beyond next year, with the period from now into year-end seasonally bearish for EURSEK.

Chart focus: AUDNZD
The AUDNZD pair has been one of this year’s great trenders, driven by the ever-wider divergence in yields at the front of the yield curve as Aussie rates have remained firmly anchored and even risen sharply from the October lows  - especially overnight on the strong AU employment data - while NZ rates trended consistently lower from July through mid-October before stabilizing. Arguably the yield spread – currently at 107 basis points for 2-year swaps, a level last seen in when AUDNZD was trading 1.25+ justifies further upside to 1.2000 and beyond, but near term, have to wonder if this is as good as it gets. Note the beautiful Elliott Wave patterns from the lows to the latest surge higher looking like a “fifth wave of wave five”. Yes, the saying goes that we should follow the trend until it bends, but this may be as good as it gets for a while. To prove the point, however, we would need a sharp rejection of this latest surge above 1.1600.