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AUD fails to capitalise on USD downturn

Tuesday 25 October, 2022

Daily Currency Update

The Australian dollar failed to capitalise on a sustained USD downturn Monday as Chinese growth concerns and a correction in CNY values countered gains won on the heels of an improvement in risk sentiment. The AUD surged through US$0.64 cents on open, touching intraday highs nearer US$0.6410 as markets continue to re-position expectations for Fed policy. Reports and comments from key Fed officials suggest the time has come to taper the pace of interest rate hikes. Having priced in a 75-point adjustment in both November and December markets have rushed to pare down bets for a supersized hike in December with the majority of analyst now betting on a 50 point amendment. The shift in Fed expectations has driven the USD lower yet the AUD has failed to take full advantage of the downturn. Concerns surrounding the Chinese growth outlook weighed on the CNY and the AUD as a proxy. President Xi’s reshuffle of the politburo elevated fears China’s Covid zero policy will continue to hamper domestic growth prospects. Xi has stacked the leadership with advocates of Covid zero and interventionist regulation. The CNY fell to a multi-year low against the USD, driving the AUD back toward US$0.63 cents. Our attentions turn now to domestic CPI inflation data. We anticipate price pressures will remain elevated with headline CPI touching 7% and core inflation up 5.5%. An upside surprise could add some pressure on the RBA to revise the pace and size of future rate hikes. We anticipate volatility leading out of the data release.

Key Movers

Price action abound through trade on Monday as markets continue to adjust expectations surrounding Fed monetary policy. The repricing in Fed rate expectations has triggered an improvement in the underlying risk narrative, prompting a broader USD downturn. The DXY dollar index fell over half a percent through trade on Monday, compounding Friday’s correction. The euro capitalised on the US downturn, up 1% on the day as dollar and a sharp downturn in Gas futures helped drive demand for the single currency. Reports gas storage levels are nearing capacity helped drive prices down below 100 Euro while lifting hopes elevated energy prices will begin to ease and reduce the burden of sustained inflation and cost of living pressures. In other news the USD/JPY has recovered half the losses suffered in the wake of the Ministry of Finance’s intervention on Friday, lifting off 146 to move back toward 149. While there was evidence of further intervention yesterday the downturn was short lived. Our attentions turn now to this Bank of Japan policy meeting. While we expect they will maintain an ultra-accommodative policy platform the chance of an adjustment in Yield Curve Controls could trigger a major market re-positioning. Inflation pressures have been growing in Japan through the last 6 months and pressure is mounting on policy makers to abandon the current framework. Should price pressure move significantly beyond 3% it will likely be a matter of when not if the BoJ will be forced to amend its controls. At this juncture we can expect the USD to reverse course. Accompanying the Bank of Japan, the Bank of Canada and ECB are expected to raise rates by 75 basis points this week and we are keenly attuned to central bank commentary in determining near term direction.

Expected Ranges

  • AUD/USD: 0.6250 - 0.6420 ▼
  • AUD/EUR: 0.6350 - 0.6490 ▼
  • GBP/AUD: 1.7680 - 1.8030 ▲
  • AUD/NZD: 1.1020 - 1.1180 ▲
  • AUD/CAD: 0.8580 - 0.8720 ▼