AUD forced below 0.72 amid higher global rates and broad US dollar strength
Tuesday 7 June, 2022
Daily Currency UpdateThe Australian dollar fell through trade on Monday, overwhelmed by a largely stronger US dollar and sustained uptick across global rates. Investors continued to ride Friday’s robust US non-farm payroll report, firming bets for a series of 50 basis point rate hikes leading into September. An uptick in labour force participation, steady unemployment and a flattening in average hourly earnings all helped build a case for the Fed to maintain its aggressive pace of rate hikes, a theory supported by Cleveland Fed Chair Loretta Mester. Mester affirmed her support for a 50-basis point hike in June and July and hinted at a 3rd 50-point adjustment in September. Having touched intraday highs at 0.7230 the AUD slipped below 0.72 US cents, finding support at 0.7190. Despite the US dollars momentum, the AUD remains relatively well bid as risk aversion declined through trade on Monday. While investors maintain a cautious outlook the further easing of COVID restrictions in China has helped bolster demand for risk. Public Transports, Restaurants and Cinemas will re-open in Beijing allowing citizen to return to the office and rebuild the services economy. Copper and nickel prices surged while Iron Ore tracked higher helping underpin the AUD and stave off a broader downward correction.
Attentions today turn to the RBA’s policy meeting and rate statement. Markets have priced in a rate rise but are divided as to just how aggressive policy makers will be. With calls for 25, 40 and 50 basis point hikes the market is pricing a 33-basis point adjustment suggesting the consensus is split between a 25-point jump and 40-point hike. While a 40-point hike isn’t a standard increment it would mean rates lift to 0.75%, extremely low given the current economic context. A hawkish surprise to the upside could help the AUD extend beyond resistance at 0.7230/50 while a miss to the downside when measured against the recent uptick in US rate expectations could push the AUD back toward supports at 0.7080.
Key MoversThe USD retained Friday’s momentum advancing against all major counterparts through trade on Monday. The Bloomberg dollar index jumped over half a percent as investors moved to price in 144 basis point rate adjustment through the next 3 months. Friday’s robust non-farm payroll print steamrolled calls for the Fed to re-assess its path to Monetary policy normalisation, driving investors price in 3 consecutive 50 basis point rates hikes. The revision in US rate expectations helped drive US rates higher a move extended through trade on Monday. US 10 year rates broke above 3% for the first time in 3 weeks while 2 year rates climbed 8 basis points to 2.73%. Having forced the Euro back below 1.07 the USD touched fresh 20 year highs against the Yen, closing in on a break above 132. The Yen has come under sustained pressure amid the resurgence in global rates as the Bank of Japan reiterated its commitment to accommodative monetary policy, further highlighting the gap between the BoJ and other central banks. The Great British Pound held up reasonably well in the face of US dollar strength emboldened by Boris Johnsons comfortable defeat of a no confidence vote. Having jumped above 1.2550 the GBP edged lower under the weight of US rates and opens this morning buying 1.2520.
Our attentions this week remain with US CPI and the ECB policy update. Both present significant risk events and will shape near term expectations for monetary policy. We expect price action.
- AUD/USD: 0.7020 - 0.7290 ▼
- AUD/EUR: 0.6620 - 0.6790 ▲
- GBP/AUD: 1.7280 - 1.7550 ▲
- AUD/NZD: 1.0980 - 1.1150 ▲
- AUD/CAD: 0.8980 - 0.9120 ▼