Australian dollar decline continues as markets pare rate cut expectations
Daily Currency Update
Stronger-than-expected US data and an extended pushback against near-term easing expectations saw yields rise through trade on Wednesday forcing the AUD below US$0.6550. Market appetite for risk has faltered throughout the first 3 weeks of 2024 and the mood soured further yesterday as investors brace for tighter financial conditions, as China’s economy faces ongoing pressures. The AUD continued to relinquish ground to the USD, showing little resistance as investors sure up near-term USD holdings and pare expectations for Federal Reserve rate cuts. The AUD extended its break below US$0.66, cruising through US$0.6650 before finding support and marking new intraday lows south of US$0.6530.Our focus now turns to domestic labour market data. With employment data key to shaping RBA policy, another robust read may ignite calls for one last RBA rate hike while a softening in labour conditions will only justify calls for the RBA to call an end to this tightening cycle. With many analysts now winding back expectations for another hike, labour market and inflation data will prove key in shaping RBA rate expectations, with AUD direction driven by implied monetary policy. With global rates and yields rising, we expect the AUD will face sustained near-term headwinds.
Key Movers
The US dollar continues to outperform major counterparts as investors are forced to pare back expectations for rate cuts. Policymakers continued to push back against near-term easing, while local data dented hopes of any shift in policymakers' outlook. US retail sales increased through December, comfortably surpassing market estimates and underlying greater-than-anticipated consumer resilience. Market pricing for a March rate cut has retracted dramatically with analysts now evenly split as to whether the Federal Reserve will move early, down from 80% just last Friday. The shift in rate cut pricing has seen an extension in US yields and allowed the DXY index to recover 3% since the late December low. With the euro and the yen lower, the GBP showed some resilience and was the best-performing G10 currency following inflation data. UK inflation picked up in December. The first increase in 10 months, sparking concerns the Bank of England will be forced to maintain tighter conditions for longer, extending bets as to when policymakers will start cutting rates.Our attention remains on global rates and yields ahead of next week's Bank of Japan and European Central Bank policy updates.
Expected Ranges
- AUD/USD: 0.6480 - 0.6630 ▼
- AUD/EUR: 0.5980 - 0.6080 ▼
- GBP/AUD: 1.9200 - 1.9600 ▲
- AUD/NZD: 1.0680 - 1.0780 ▼
- AUD/CAD: 0.8800 - 0.8900 ▼