AUD/USD eyes test of 0.7200 to the downside as risk-sensitive G10 currencies sold

• AUD/USD has been under pressure in recent trade as risk-sensitive currencies are sold and safe-havens (including USD) are bought.
• Volumes were light with Australian and UK markets shut but are picking up now the US session gets underway.

AUD/USD has seen quite a sharp pullback in recent trade, dropping from Asia Pacific levels near 0.7250 to current levels underneath 0.7220 upon the arrival of US market participants ahead of the US open. Volumes during the Asia Pacific and early European sessions were much lower than normal and roughly in line with that seen during last week’s thinned holiday trade given the closure of Australian and UK financial markets on Monday. Thus, as trading volumes have started to pick up for the US session, markets seem to have found a little conviction, with the conviction in FX markets on Monday being a preference towards a stronger dollar.

This has weighed on the Aussie, which looks on course to test the key 0.7200 level shortly. At current levels, AUD/USD is trading about 0.7% lower on the session and is the worst performer amongst its G10 peers, with downside in the prices of key Australian metal exports (Copper -1.5%, Gold -1.0%) not helping. With the pair having dropped under short-term trendline support, more selling may well be in store.

The Aussie’s performance is broadly in fitting with G10 FX markets adopting a more defensive/risk-off bias on Monday, with the safe-haven dollar and yen outperforming despite stocks in Europe and the US (in pre-markets, at least) trading higher. There isn't any one theme or new developments that can be pointed at as to why FX markets are in a more risk-off mood, but traders may be taking some profit on risk-sensitive currencies after their recent run of strength.

Some are fretting about record Omicron infection rates in the UK, US and elsewhere and a potential surge in hospitalisations. Elsewhere, some have suggested the surge in the dollar versus some of its G10 peers could be down to a large rise on the day in US bond yields (10s up 9bps to near 1.60% and 2s up roughly 6bps to just under 0.80%). If this was the case, one would expect that USD/JPY (the most sensitive G10 pair to movements in rate markets) would be surging, which at the moment it isn’t.