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Australian dollar buoyed by improved risk appetite

Wednesday 18 May, 2022

Daily Currency Update

The Australian dollar extended back above 0.70 US cents on Tuesday amid renewed demand for risk following reports China will soon ease lockdown restrictions. Shanghai recorded a third straight day with zero community transmission, a key milestone and important marker allowing officials to begin lifting restrictions. With other provinces reporting declining numbers, there is hope a broader return to normal is now on the horizon. Improved risk sentiment propelled the AUD off intraday lows at US$0.6970 and back above US$0.70, touching intraday highs at US$0.7040. The Asian session advance was underpinned by a slew of stronger than anticipated data sets across Europe, the UK and the US. Outperformance across key macroeconomic measures has helped abate fears of a near-term recession and offers scope for a rebound in activity through H2. A sustained improvement in the underlying risk narrative should help the AUD recover losses suffered through the last 4 weeks, however, risks to the downside remain in play. While Shanghai appears to have halted Omicron’s advance outbreaks in other provinces have not yet been quashed and with a new pocket of infections found in Beijing it is unlikely we will see China enjoy a return to full capacity in the near term. The transmissible nature of the Omicron variant will mean spot lockdowns and restrictions will remain in play until the pressures of COVID-19 ease or China amends its current policy. That said our attentions today turn to a critical quarterly wage price index. Wage growth has been key in shaping RBA policy, as members delay wholesale changes to the monetary policy setting ahead of a sustained improvement in wage data. As inflation pressures rise a lacklustre print will make it difficult for the RBA to raise rates aggressively while a strong read could help extend this week's AUD rally as markets price in a faster pace of RBA rate hikes.

Key Movers

The euro and the pound carried the day on Tuesday, advancing on the heels of stronger than anticipated local data points and a general recovery in the underlying risk narrative. The pound lead gains across major currencies up over 1% following a surprise decline in the unemployment rates. Job vacancies rose in March while unemployment fell to 3.7% its lowest level in almost 50 years. Hopes improved labour market conditions will help drive the economy through near term headwinds created by rising inflation and a slowdown in growth propelled the GBP back through US$1.2450 and toward intraday highs just shy of US$1.25. The euro followed pound’s lead, pushing back above US$1.05 after Q1 GDP data was revised higher while comments from ECB policymaker Knot helped boost expectations for a shift in monetary policy conditions as soon as July. The suggestion of a 50-basis point hike helped propel an uptick in market rate expectations with investors now pricing a 100 basis point uptick by year end. Our attentions turn now to UK CPI data, US housing data and Canadian CPI as markers that could possibly disrupt the underlying risk narrative.

Expected Ranges

  • AUD/USD: 0.6880 - 0.7080 ▲
  • AUD/EUR: 0.6580 - 0.6720 ▼
  • GBP/AUD: 1.7580 - 1.7920 ▲
  • AUD/NZD: 1.0980 - 1.1080 ▼
  • AUD/CAD: 0.8930 - 0.9030 ▲