Home Daily Commentaries AUD under pressure as risk off narrative spills into new week

AUD under pressure as risk off narrative spills into new week

Daily Currency Update

An extension in the risk off narrative plagued the AUD through trade on Monday as fears China’s extended lockdowns will further exacerbate global supply chain shortages and extend near term inflationary pressures dominated direction. Covid-19 case numbers continue to rise across the majority of China’s 31 provinces despite strict lockdown measures and a zero COVID policy. Key port areas are now affected with Guangzhou reporting new cases, prompting the introduction of heightened restrictions. The strict protocol has prompted factories and warehouses to close while trucking shortages and port congestion heap more pressure on a supply chain already stretched to breaking point. The market focus on lockdowns has prompted a correction across commodity prices and commodity currencies. The AUD underperformed giving up 0.7450 and falling steadily overnight before finding support at 0.7415.

With the market focus increasingly on lockdowns and global bond performance we anticipate the risk off narrative will continue through Tuesday as are attentions are drawn to USD CPI inflation data tonight. With expectations inflation could hit a 40-year high there is ample justification for an aggressive Fed tightening cycle ahead.

Key Movers

The US dollar outperformed through trade on Monday, advancing against the majority of counterparts as global bond rates continue to rise and a risk off mood pushes markets toward haven assets. While we have seen a consolidation across near team bond yields with 2-year rates consolidating around 2.5% longer dated rates have risen as markets seek to price in a correction and normalisation in monetary policy. Fears a rapid shrinking in the Fed’s balance sheet will mean higher longer-term rate is pushing 10 year bond yields toward multi year highs. European yields were also elevated with German 10-year Bund notes pushing toward their highest level since 2015. The USD found added support amid growing fears Chinese lockdowns will heap even more pressure on a stretched global supply chain. Fears inflationary pressures will linger exacerbated a risk off shift helped fuel demand for haven currencies. That said, the Japanese Yen, traditionally a benefactor of a risk off mood, closed Monday as the days worst performer. The USD reached 7 year highs pushing through 125.50 as a burgeoning gap in monetary policy expectations and yields force markets away from the Yen. The Yen’s underperformance against the USD has seen it give up ground against key crosses as well. With few signs the current cycle will end there is scope for further JPY downside in the near term as sentiment continues to sour.

Our attentions turn now to US CPI data this evening as a key marker guiding Fed decision making through 2022 and beyond.

Expected Ranges

  • AUD/USD: 0.7380 - 0.7550 ▼
  • AUD/EUR: 0.6770 - 0.6850 ▼
  • GBP/AUD: 1.7420 - 1.7650 ▲
  • AUD/NZD: 1.0820 - 1.0910 ▼
  • AUD/CAD: 0.9300 - 0.9400 ▼