AUD emboldened as bond rates climb and risk sentiment improves
Friday 29 October, 2021
Daily Currency Update
AUD - Australian Dollar
Despite volatility across bond markets intensifying price action for major currencies was well contained through trade on Thursday with the AUD rallying toward 0.7550 on the back of a weaker US dollar. Domestic bond rates exploded higher after the RBA elected not to enforce its 2024 yield curve controls. The bond rate jumped sharply to 0.54% well above the RBA 0.1% target and puts policy makers in a very tricky position. With inflation growing at a faster pace than expected markets no longer believe the RBA can hold onto the cash rate through 2022 and 2023, meaning even if the RBA steps in to defend further bond hikes the market will likely continue to push gains. Our attentions today turn to the RBA announcement to see whether they do intervene. Inaction will likely see yields surge again and could underpin additional AUD upside. With the AUD up 0.2% on the day and testing resistance at 0.7540 we are keenly attuned to any shift in rhetoric ahead of next week’s November policy meeting and rate statement.
Key MoversThe US dollar gave up ground to most counterparts through trade on Thursday as risk sentiment improved, and the Euro tracked higher. The ECB and President Lagarde affirmed its commitments to a transitory inflation outlook, highlighting expectation price pressures will fall back below target through the latter half of 2022 and into 2023. Despite sticking to the script Lagarde refused to comment on whether the market was getting ahead of itself in pricing a rate hike next year, commenting “it’s not for me to say”, a potential admission the ECB’s current stance may be wrong. The ECB also confirmed the pandemic bond purchasing program will end as scheduled in March while deferring a decision to bolster its regular asset purchase program into December. Investors absorbed Lagarde’s comments and drove European yields and the shared currency higher, suggesting her push back was somewhat halfhearted. Having opened below 1.16 the Euro surged toward intraday highs at 1.1690.
Our attentions turn now to European inflation data and US PCE numbers ahead of next week's all-important Fed policy update.
- AUD/USD: 0.7450 - 0.7590 ▲
- AUD/EUR: 0.6390 - 0.6490 ▼
- GBP/AUD: 1.8180 - 1.8350 ▼
- AUD/NZD: 1.0420 - 1.0490 ▼
- AUD/CAD: 0.9220 - 0.9350 ▲