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AUD tumbles following mammoth increase in US CPI data

AUD - Australian Dollar

The Australian dollar fell sharply through trade on Wednesday as demand for risk evaporated and investors chased haven assets namely the USD. Having drifted steadily downward through the domestic session the AUD crashed through 0.78 and 0.7750 to mark intraday lows at 0.7720 after US CPI data wrote in well beyond even optimistic expectations. Headline CPI rose 0.8% m/m while core CPI jumped 0.9% pushing annual price increases up 4.2% and 3% respectively. The sharp jump follows an upside surprise in March and suggests rising input costs are now flowing through to the real economy.

While we still anticipate inflation shocks will act as a drag on the USD in the long term, shifting interest rate expectations and fluctuations in the risk narrative leaves the door open for a near term USD upswing. We anticipate the Fed will continue to signal its commitment to looking through transitory inflationary pressures, however, should prices continue to rise prompting a monetary policy amendment the outlook for the AUD begins to turn bearish. We continue to watch inflation markers as the key driver of currency market direction.

Key Movers

The US dollar advanced against all majors excluding the CAD overnight as a dip in risk demand, an uptick in US treasury yields and over-performance in domestic inflation data all lent support to the world’s base currency. CPI data showed consumer prices jumped sharply in April as rising input costs across both labour and raw materials flowed through to the real economy. Near-term inflation concerns have shrouded currency markets in recent days and the latest print forced the 10-year break event point above 2.5% to its highest level in 8 years. With investors scrambling to adjust interest rate expectations, short term demand for risk assets will likely come under pressure. At this point, we maintain our negative outlook for the USD as higher inflation coupled with rising fiscal debt and a burgeoning trade deficit should remain dollar negative. That said, sustained inflation pressure will continue to shape direction across currency markets through the weeks and months ahead.

Expected Ranges

AUD/USD: 0.7680 - 0.7830 ▼

AUD/EUR: 0.6370 - 0.6450 ▼

GBP/AUD: 1.8020 - 1.8420 ▲

AUD/NZD: 1.0750 - 1.0830 ▲

AUD/CAD: 0.9330 - 0.9480 ▼