An overnight rally in the Australian dollar that took the currency close to a three-month high faded during the local session on Tuesday after business conditions fell to the lowest level in 1½ years.
The Aussie rose as high as US77.29¢ against its US counterpart after the prices of key commodities coking coal and iron ore surged and as markets became more confident of a Hillary Clinton victory in the US presidential election, buoying risk sentiment.
"The Australian dollar benefited from the boost in risk appetite ... and commodities also posted decent gains," said NAB currency strategist Rodrigo Catril.
But like on nearly a dozen other occasions over the past three months, the gains quickly faded and the currency dropped back towards the US77¢ threshold it's been stuck at, buying US77.02¢ in late trade.
Contributing to downward pressure on the Aussie, business conditions and confidence both declined in October, according to NAB's monthly survey.
"The recent moderation in some survey indicators is a concerning trend that warrants close monitoring, but our assessment is that the deterioration to date is not yet enough to warrant a significant change in the outlook," said NAB chief economist Alan Oster.
JPMorgan economist Ben Jarman said it was likely that the rise in the Australian dollar this year was at least partly responsible for the weakening in trading conditions, a key component of NAB's index.
"It therefore seems unlikely that RBA officials can maintain their benign view on the exchange rate indefinitely, and the pressure will remain toward lower rates in 2017."
Clinton win divides
Traders were divided if a victory by Mrs Clinton could give the Australian dollar a more decisive push higher.
"AUD/USD took little notice of the FBI investigation until it was over, suggesting we could see a bullish breakout if Clinton is victorious tomorrow," said ThinkMarkets senior market analyst Matt Simpson. "A break of US77.34¢ will send it to a three-month high and leaves potential to test a 2016 high (of US78.35¢)."
Since August the currency has been trading in a relatively narrow corridor between US74.5¢ and US77.5¢, despite big gains in key commodity prices such as coking coal and iron, which have pushed up Australia's terms of trade.
But the tailwinds from rising commodity prices as well as lowered expectations of another Reserve Bank rate cut have been offset by growing expectations of a US rate rise, which have boosted the greenback.
HC Securities CEO Mark Lennox noted that a victory by Mrs Clinton was likely to clear the path for a tightening by the US central bank, which in turn could once again prevent a push higher by the Aussie.
"The only thing standing in the way of the Australian dollar moving higher with commodities is a potential Clinton win as the US Federal Reserve will likely raise rates in December," he said.
