Home Daily Commentaries AUD slips in face of global bond sell off and risk off mood

AUD slips in face of global bond sell off and risk off mood

Daily Currency Update

The Australian dollar retreated through trade on Thursday amid an extended surge in global bond yields and a definitive risk-off shift. Having maintained a largely narrow trading handle through the domestic session, the AUD plunged off intraday highs at US$0.6690, marking intraday lows just above US$0.66 following stronger than anticipated US jobs and services data. US ISM services data printed well above expectations while ADP employment data showed payrolls surged at their fastest pace in nearly 12 months. The robust reads forced investors to extend their expectations for a peak fed funds rate pricing in a July rate hike, while elevating the likelihood of additional hikes before November. Two-year yields surged higher and 10-year rates charged above 4%, forcing equities and commodity currencies lower. A definitive risk off tone enveloped markets through the back half of the overnight session and while the AUD rebounded off lows it was unable to garner any real momentum and opens this morning buying US$0.6630.

Our attentions turn now to US non-farm payrolls. While we expect labour market growth will have slowed, the robust ADP employment read affords the possibility of a print beyond market estimates. A strong read will enable a further extension in the weeks bond sell off and drive-up fed rate hike expectations, possibly forcing the AUD back below US$0.66, while a softer print could help fuel a reversal and elevate the AUD into the weekly close. We expect the AUD to track between US$0.6530 and US$0.6730.

Key Movers

Lower risk appetite and a surge in global bond rates has seen commodity currencies underperform and the USD recover losses suffered early in the day. The dollar had trended lower through the Australasian session and looked set to extend losses into the weekly close, before an ISM services report and ADP employment data shocked investors, printing well above consensus estimates. The service sector rose 3.6pts, underpinned by strong gains in the employment index. When coupled with the robust ADP employment print, market concerns that labour market conditions remain too strong if inflation is to continue tracking toward target were elevated. The service sector and labour market appear impervious to the Fed’s aggressive program of monetary policy tightening, lifting peak fund rate expectations and ensuring a rate hike is all but priced in later this month. While higher two and ten year rates helped the USD recover early losses, European and UK yields surged higher as well allowing the euro to track back toward 1.09 and sterling to consolidate a move above 1.27.

Despite the stronger rates backdrop the yen found support as a risk asset, while comments from BoJ deputy Governor Uchida helped fuel expectations a tweak in policy makers ultra easy monetary policy platform may be forthcoming. The USD gave up intraday highs above 144.50 and open this morning back nearer 144.

Our attentions turn now to US non-farm payrolls. While we expect labour market growth will have slowed, the robust ADP employment read affords the possibility of a print beyond market estimates.

Expected Ranges

  • AUD/USD: 0.6550 - 0.6730 ▼
  • AUD/EUR: 0.6030 - 0.6150 ▼
  • GBP/AUD: 1.8980 - 1.9380 ▲
  • AUD/NZD: 1.0700 - 1.0800 ▼
  • AUD/CAD: 0.8800 - 0.8900 ▲