Wider Trade Surplus Lifts Australian Dollar as US Dollar Slips

• A$2,826M was Australia's September Trade Surplus. Higher exports and lower imports drove the sharp widening.
• Concerns about political deadlock after a Democratic sweep in the midterm elections weighed on the US Dollar.
• Robust US economic figures reinforce the Federal Reserve's hawkish position, limiting the Greenback's losses.

AUD/USD trades near 0.7010. The pair is advancing for a second straight day during Thursday's Asian session, supported by a modest rise in the Australian Dollar (AUD) after Australia's latest Trade Balance release.

September's Australian Trade Surplus widened sharply month-on-month to A$2,826 million. The previous reading was revised to a surplus of A$185 million from the initially reported A$495 million. Exports increased by 2.3% in September, following August's revised rise of 3.1%, initially reported as 3.7%. Imports, by contrast, declined by 3.3% after a revised 6.2% increase in the preceding month, initially reported as 5.8%.

Broad US Dollar (USD) weakness gave AUD/USD an additional lift. Heavy selling hit the Greenback after the Democrats swept the midterm elections and secured both houses of Congress, fuelling fears of potential political deadlock in Washington. The election result also prompted markets to anticipate an end to the Middle East conflict. Oil prices dropped sharply on those expectations, placing further pressure on the USD.

Resilient US economic figures could nevertheless contain the US Dollar's losses. The ADP report showed that private-sector employment increased by 86,000 in October, exceeding expectations of 69,000. September's reading, however, was cut to 86,000 from 90,000. At 54.5, the ISM Services PMI was slightly lower than the previous 54.9 and fell just short of the 54.8 forecast, although it remained comfortably in expansionary territory.

With these firm economic readings, the Federal Reserve (Fed) has scope to retain its hawkish policy stance as it seeks to bring inflation back to its 2% target. Markets assign an 80% probability to a further interest rate increase in December, according to the CME FedWatch Tool. Attention now shifts to forthcoming US data: weekly Initial Jobless Claims on Thursday, followed by Friday's Nonfarm Payrolls (NFP) report.

USD retreats as election-driven risk appetite boosts high-beta currencies

Improving risk sentiment is evident in moves across the major currencies, according to Scotiabank analysts, who report that the “USD is weakening broadly in response to Tuesday’s US midterm election results,”. They say relative G10 FX performance “is suggestive of risk appetite,” with the Mexican Peso out in front on “a near-1% gain on the day”. The NZD, NOK and AUD are “up between 0.6-0.7%,” and even the EUR and GBP “show relatively sizeable 0.5% rallies from Tuesday’s close.”