FOREX-Aussie hits two-week low; risk-off mood supports US dollar

The Australian dollar hit a two-week low on Thursday after the head of the central bank hinted at possible monetary easing, while the risk-off sentiment kept the U.S. dollar supported and most other major currencies on the defensive.

The British pound, lifted by signs of progress in Brexit talks on Wednesday, surrendered some of those gains on Thursday as concerns about trade talks with Europe resurfaced and London faced tighter coronavirus restrictions. France has imposed curfews as coronavirus infections rise and other European Union members were also responding to spiking new cases with fresh restrictions.

Markets fear a new wave of lockdowns could stall the global recovery just as hopes for U.S. stimulus before the Nov. 3 election are fading, ditching riskier assets such as equities in favour of safe-haven such as the dollar and the yen. "A broader risk-off tone has enveloped markets this morning," said Chris Beauchamp, chief market analyst at IG.

"Steve Mnuchin’s comments about a U.S. stimulus bill now looking unlikely before the election were perfectly placed to unseat a market that had rallied hard on hopes of such stimulus, perhaps naively," Beauchamp said. The U.S. dollar index traded at 93.78, a one-week high, while riskier assets, such as Scandinavian currencies, were down more than 1% on the day.

This week, COVID-19 vaccine clinical trials from two pharmaceutical companies got delayed after patients fell ill. U.S. drug inspectors also uncovered quality-control problems at an Eli Lilly and Co pharmaceutical plant that is ramping up to manufacture a COVID-19 drug.

In Australia, the central bank is assessing whether buying longer-dated bonds would help the economy and considering an interest rate cut, Reserve Bank of Australia Governor Philip Lowe said in a speech.. The RBA intervenes to keep the three-year yield at 0.25% but does not control yields further out the curve. Marshall Gittler, head of investment research at BDSwiss Group, said he expected the Aussie to weaken relative to other commodity currencies, particularly the Canadian dollar. "I think there’s much more room for further loosening in Australia than in Canada."

Money markets price in a November rate cut and bond markets factor in the RBA possibly starting to buy longer-dated debt, with 10-year bond futures up 8.5 ticks at their highest since April. The Aussie dollar fell about 1.3% to a two-week low of 0.7068 per U.S. dollar and the Japanese yen by 1% . The New Zealand dollar followed suit, losing 0.8% against the U.S. currency..

The Norwegian crown hit one week-lows against the dollar and the euro at 9.3690 and 10.9705, respectively. The Swedish crown also weakened on concerns a global slowdown would hurt the country's open economy. The euro was last down 0.2% at $1.1721 while the Japanese yen was steady at 105.23 to the dollar.

Elsewhere, the British pound fell 0.4% to $1.2961 and dipped 0.2% against the euro to 90.44 pence. The day before the pound rose amid hopes that Brexit talks, scheduled to continue on Thursday and Friday, will continue beyond this week. UK Prime Minister Boris Johnson had set a deadline of Oct. 15 for progress in the talks.

Traders will be also watching for a line-up of U.S. economic data later in the session, from initial jobless claims to the Philly Fed Business Index.