AUD tests new yearly low as March rate cut from Fed looking increasingly unlikely

Daily Currency Update

The Australian dollar struggled through trade on Monday, extending Friday’s post-US non-farm payroll sell-off, consolidating a break below US$0.65. The AUD was among the worst performers through trade on Monday, down nearly 1.5% since the middle of last week, as investors adjusted both RBA and Federal Reserve rate expectations.

The USD surged Friday following a scorching US non-farm payroll print that all but eliminated the possibility of a Federal Reserve March rate cut. Markets had begun paring expectations for a rate cut in March following last week's Fed policy meeting and Friday’s labour market print. They doubled down on bets Monday after stronger ISM services data and comments from Chair Jerome Powell all but ensure the Fed won’t move before May.

US yields have surged, driving the USD higher, while the AUD faces the possibility of an earlier-than-anticipated rate cut. A softer-than-anticipated December inflation print has brought forward expectations for a rate cut. Where we were previously looking at Q3 as a possible starting point for rate adjustments, the acceleration of disinflation has elevated calls for a cut as early as June.

Our attention turns to the RBA’s first 2024 policy meeting today. It is the first in the new format of meeting with officials sitting down Monday afternoon for the first of a series of meetings over 2 days. The new format also sees RBA governor Bullock front a post-meeting press conference which we hope will provide greater clarity, transparency and forward guidance.

The market is united in its expectation that rates will be kept on hold and we expect few signals as to the timing and trajectory of future rate cuts, yet the tone and lustre of this first meeting could help the AUD consolidate supports near US$0.6470, or drive a break back toward US$0.64.