AUD finds support as risk aversion abates amid hopes of Middle East resolution

Daily Currency Update

The risk-off tone that enveloped markets leading into last week’s close eased through trade on Monday allowing the AUD room to pitch back above US$0.63. Markets tempered their aversion to risk amid hopes and expectations a resolution of some form will be brokered between Israel and Hamas before an all-out regional war is triggered. Having slipped below US$0.6290, the AUD clambered back above US$0.63 extending toward intraday highs at US$0.6345.

Our attention turns now to the RBA minutes and US retail sales data ahead of key commentary from Fed Chair Jerome Powell. While we expect few surprises from the RBA minutes, any signal new that the change in leadership will prompt a change in strategy could prompt price action through the local session. While US retail sales will prove key in assessing the underlying health of the US economy, this week’s Powell commentary is the headline risk event.

The outperformance across rates and treasury yields hinges on expectations for Fed policy. With the labour market proving robust and inflation pressures sticky, we are attuned to signals from Powell as to whether the Fed will hike rates again this year. With financial conditions tightening naturally through the last 3 months, the question of more rate hikes is finely balanced and key in determining near-term AUD direction.