Australian Dollar advances as Trade Surplus widens, US Dollar dips

• Australia's September Trade Surplus widened significantly to A$2,826M, driven by rising exports and falling imports.
• The US Dollar weakened due to political gridlock fears following a Democratic sweep in midterm elections.
• Resilient US economic data supports the Federal Reserve's hawkish stance, capping the Greenback's downside.

AUD/USD extends its gains for the second consecutive day, trading around 0.7010 during Asian hours on Thursday. The pair gained ground as the Australian Dollar (AUD) inched higher following the release of Australia’s latest Trade Balance report.

Australia’s Trade Surplus widened significantly to A$2,826 million month-over-month in September, up from a revised surplus of A$185 million in the previous reading (initially reported as A$495 million). Australian exports rose by 2.3% in September, following a revised 3.1% increase in August (initially 3.7%), while imports fell by 3.3% after growing by a revised 6.2% the previous month (initially 5.8%).

Further upward momentum for the AUD/USD pair stemmed from broad-based weakness in the US Dollar (USD). The Greenback faced heavy selling pressure after a Democratic sweep in the midterm elections resulted in control of both houses of Congress, raising concerns over potential political gridlock in Washington. Additionally, market expectations of an end to the Middle East conflict following the election outcome triggered a sharp drop in oil prices, adding further pressure on the USD.

Despite these headwinds, the US Dollar's decline may remain limited due to resilient domestic economic data. Private-sector employment grew by 86,000 in October, according to the ADP report, beating the expected 69,000, though September’s figure was revised downward to 86,000 from 90,000. Meanwhile, the ISM Services PMI slipped slightly to 54.5 from 54.9, just below the forecasted 54.8, but remained safely within expansionary territory.

These solid economic indicators provide the Federal Reserve (Fed) with room to maintain its hawkish stance in its effort to return inflation to the 2% target. According to the CME FedWatch Tool, markets are currently pricing in an 80% probability of another rate hike in December. Investors are now turning their attention to upcoming US economic releases, including weekly Initial Jobless Claims on Thursday and the Nonfarm Payrolls (NFP) report on Friday.

USD softens as post-election risk appetite lifts high-beta FX

Analysts at Scotiabank report that the “USD is weakening broadly in response to Tuesday’s US midterm election results,” with the pattern of moves across majors pointing to a clear improvement in risk sentiment. They note that the relative performance within G10 FX “is suggestive of risk appetite,” as the Mexican Peso leads with “a near-1% gain on the day” and the NZD, NOK and AUD are “up between 0.6-0.7%,” while even the EUR and GBP “show relatively sizeable 0.5% rallies from Tuesday’s close.”