USD May Fall on Covid Vaccine Hope, AUD Rattled by US-China Trade War

Trade War, Covid-19 Pandemic, Coronavirus Vaccine, AUD/USD – TALKING POINTS

• US Dollar may retreat with the anti-risk Japanese Yen on Covid-19 hope
• However, they could also rise vs AUD and NZD on renewed US-China trade tension
• AUD/USD congestive cocoon will eventually have to decide which way to break out

At the end of Wall Street trade on Friday, the Dow Jones, S&P 500 and Nasdaq indices closed 1.44, 1.05 and 0.66 percent higher. Investors’ optimism was lifted after Gilead Sciences Inc (GILD) published a report saying that its antiviral drug Remdesvir showed promising signs of treating coronavirus-infected patients. The data showed that patients at risk of dying from Covid-19 was reduced by 62 percent. GILD stocks subsequently jumped over two percent.

However, buoyancy in stocks was not as clearly reflected in foreign exchange markets. While initially showing a risk-on tilt – which pushed the haven-linked US Dollar and Japanese Yen lower – comments from US President Donald Trump shifted this dynamic. He said that it is highly unlikely that a “Phase 2” trade deal with China will occur at this time.

Equity markets shrugged at this comment. However, the China-sensitive Australian and New Zealand Dollars fell while the Greenback rose. The relatively indifferent reaction by US equity markets suggests that medical metrics and vaccine-related reports are the markets’ biggest focus – at least for now. Crude oil prices ended the day higher along with the petroleum-linked Norwegian Krone.

Monday’s Asia-Pacific Trading Session

With a relatively sparse data docket, traders will likely place their focus on themes like the coronavirus and renewed US-China trade tensions. AUD and NZD may extend declines on Asian geopolitic risks, including the situation in Hong Kong after Beijing passed a sweeping national security law. In this environment, the anti-risk JPY and USD may rise against these two sentiment-geared currencies.

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However, hope for a Covid-19 vaccine could hurt the Yen and Dollar’s prospects versus other non-China-sensitive currencies. Asia-Pacific stocks may rise, though the Hang Seng Index may remain at the mercy of geopolitical stress amid a spike in Hong Kong virus cases. To learn more about the impact of international affairs on financial markets, be sure to follow me on Twitter @ZabelinDimitri.

AUD/USD Analysis

AUD/USD continues to trade within a narrow but critical inflection range between 0.6911 and 0.7018. The pair’s indecision over the past few weeks indicates a lack of confidence in upside potential, but also hesitation in throwing in the proverbial towel. A break above or below these parameters with meaningful follow-through could signal either the resumption of the prior uptrend or the start of a notable retreat.

AUD/USD – Daily Chart

AUD/USD chart created using TradingView

— Written by Dimitri Zabelin, Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitriTwitter