AUD plunges as risk off mood engulfs markets
Friday 10 June, 2022
Daily Currency UpdateA risk off mood enveloped markets through trade on Thursday and sent the AUD tumbling back below 0.71 US cents. Having tracked sideways through the domestic session, the AUD fell sharply through the European and North American trade as risk sentiment deteriorated. While there was no obvious catalyst prompting the sudden shift in outlook, fears inflation pressures will continue to rise through the near term as global growth plateaus seemingly overwhelmed markets and prompted a flight to haven assets. The AUD gave up 0.72 US cents in the wake of the ECB policy announcement, where in President Lagarde did little to ease fears, highlighting fragmentation risks and a fragile economic recovery. As expected, the ECB announced an end to its QE program and provided clear policy guidance, confirming it will hike rates in July and again in September. The Hawkish policy update, however, did little to lift the euro and peripheral major currencies, and instead a downgrade in the growth outlook and upgrade in inflation forecasts weighed on investors. Slipping below 0.71, the AUD touched lows at 0.7095, giving up 40% of the rally enjoyed since the May 12 low. With support in play around 0.71, a consolidated turn lower and break below 0.7071 brings into play key technical supports at 0.7050/55 and psychological supports at 0.70. Our attentions turn now to US CPI data tonight. We anticipate inflation will continue to run well above the Fed target range, up another 0.5% month on month. With the market incredibly sensitive to inflation surprises, anything outside of medium estimate will spark volatility leading into the weekly close.
Key MoversThe US dollar opens higher this morning amid a risk off backdrop and reaction to the ECB’s policy update. Despite the ECB’s hawkish policy shift, the euro gave up lead in highs at 1.0775 ,slipping back below 1.07 and 1.0650 touching intraday lows at 1.0620. Concerns surrounding stagflation outweighed policy makers commitment to end quantitative easing supports and lift interest rates, as investors (despite the hawkish surprise) see ECB policy action as the bare minimum response. The ECB remains woefully behind the real interest rate curve as inflation expectations continue to outpace policy change. This week a pattern has emerged where in currencies have not been rewarded for hawkish central bank policy changes. Both the RBA and ECB adopted plans to tighten monetary policy conditions beyond market estimates, yet outside the initial knee jerk market response both have tracked lower in the aftermath. With near term inflation expected to rise through Q2 and Q3, fears rapidly rising interest rates will derail a broader economic recovery are weighing on investors.
In other news, the yen found support amid the risk off backdrop yet continued its struggles against the USD. Having touched 134.50, the dollar remains on track to create fresh 20-year highs before the week is out.
The Great British pound slid below 1.25 as markets move past the Conservative’s political melee and focus shifts back to the domestic economic uncertainty and Bank of England’s unclear policy signals. Having shifted off a correlation with risk trade, a re-alignment appears to be emerging which could weigh on the GBP through the near term.
Our attentions tonight turn to the US CPI print. The market is highly sensitive to inflationary pressures at present, so we expect reasonable price action leading into the weekly close.
- AUD/USD: 0.7030 - 0.7190 ▼
- AUD/EUR: 0.6630 - 0.6730 ▼
- GBP/AUD: 1.7430 - 1.7680 ▲
- AUD/NZD: 1.1080 - 1.1180 ▼
- AUD/CAD: 0.8980 - 0.9050 ▲