AUD vulnerable as markets wrestle contrasting monetary policy expectations
Daily Currency Update
The Australian dollar tracked lower through trade on Monday, again failing to extend a break above US$0.67 as markets continue to wrestle with the timing and trajectory of US Federal Reserve rate cuts. With US markets closed in observance of Martin Luther King Jnr Day and little headline data available on the domestic docket, the AUD tracked toward US$0.6650 as markets continue to pair gains won through the back of December.Reports the PBOC left its one-year lending rate unchanged at 2.5% did little to boost AUD demand, despite an improvement in the CNH against the USD. Markets were pricing a 10-point cut amid expectations officials would continue to improve credit conditions and drive growth. While the CNH climbed to 7.150, lingering concerns surrounding the stability of the Chinese economy and underlying USD strength forced a break back toward 7.19, offering little support to the AUD as a proxy.
With global rates higher the AUD will likely remain on the back foot and our attentions turn to commentary from Fed policymaker Christopher Waller. Waller is well respected among Fed commentators and his comments could prove key in guiding market expectations for Fed policy change. Without clear Fed forward guidance, we expect the AUD to trade between US$0.66 and US$0.67.
Key Movers
With US markets closed for the Martin Luther King Jnr Day public holiday, attention shifted to European yields and ECB policy expectations. European Central Bank officials pushed back against market expectations for rate cuts in the first half of the year, suggesting policy will remain restrictive, potentially through 2024 and into 2025, despite sustained falls in macro indicators.German GDP data contracted through Q4 while industrial production plunged in the 12 months to November amplifying market calls to announce a rate cut. Instead, ECB officials countered, marking June as the earliest point to consider a rate adjustment. With ECB officials steadfast in their commitment to the current policy platform, markets were forced to wind back implied rate cut expectations allowing the euro to advance against a broadly stronger USD.
While the euro edged higher, the USD index closed higher on the day. A backdrop of higher global rates forced the JPY to give up 0.7% while commodity currencies continued to struggle with the CAD, AUD and NZD all lower and the GBP slipped back below 1.2750.
Our focus now turns to UK Labour market data and Fed commentary, as Governor Christopher Waller hits the wires. Implied policy expectations will continue to dominate direction. Waller's economic outlook and policy expectations could prove key in shaping market pricing.
Expected Ranges
- AUD/USD: 0.6600 - 0.6700 ▼
- AUD/EUR: 0.6020 - 0.6120 ▼
- GBP/AUD: 1.8900 - 1.9200 ▲
- AUD/NZD: 1.0700 - 1.0800 ▲
- AUD/CAD: 0.8900 - 0.9000 ▼