AUD/USD retraces early Asian gains, falling back below the 0.6700 level

• AUD/USD retreats from early gains as liquidity concerns persist despite central banks' efforts.
• Investors are cautious despite the swap line, as two more European banks are on the radar.
• All eyes are on the Fed and their expected 25 bps rate hike.

AUD/USD risk proximity took a leg higher in early Asian trading but retraced after hitting the 0.6730 mark. It is currently trading unchanged.. In the early Asian hours, risk appetite expanded along with some high beta currencies on the back of coordinated efforts from major central banks on the liquidity crunch.

Last week we saw many commercial banks starting to fall one by one, with Credit Suisse being among the largest. Swiss authorities urged UBS to acquire the troubled Credit Suisse during the weekend. At the same time, other major central banks like the Federal Reserve (Fed), Bank of England (BoE), European Central Bank (ECB), and Swiss National Bank (SNB) took coordinated efforts to alleviate the liquidity crisis.

The Fed has opened its swap line to supply US Dollars to some major central banks to ease any liquidity drain on the US Dollar front, as it is the world reserve currency. The Bank of Japan (BoJ) remains isolated from this dollar bidding program, citing no financial stress evidence yet.

That being said, two European commercial banks are under scrutiny for liquidity contagion, which could be a possible reason for investors to become cautious despite the swap line.

On the other side, the People's Bank of China (PBoC) kept its benchmark rate unchanged as they had already cut the Reserve Requirement Ratio (RRR) by 25 bps on Friday. The consistent easing from PBoC is widening the yield differential with others and is likely to keep capital outflows intact.

Some earlier comments from Reserve Bank of Australia (RBA) Assistant Governor Christopher Kent stated that the bank would consider financial conditions for the next policy meeting but downplayed the current scenario by saying it's just a small number of poorly managed banks.

All eyes are set on the FOMC meeting if they are still to deliver a 25 basis point (bps) rate hike, and if yes, what will be the forward guidance? The most likely scenario could be a done deal, but be ready for any surprise.

Levels to watch