AUD extends back toward 0.70 on improved risk sentiment
Daily Currency UpdateThe Australian Dollar enjoyed a choppy start to the week, slipping below 0.69 US cents before finding support to close higher on the day. Risk sentiment deteriorated through the domestic session following softer than anticipated macroeconomic data from China. Monthly activity indicators printed well below expectations, suggesting the impact of lockdowns across key cities has been much greater than first anticipated. Retail sales showed an 11% contraction year on year while industrial production tumbled 3% (incredibly weak by China standards). A risk off vibe permeated equities and currency markets and forced the AUD toward intraday lows at 0.6880 before a shift in sentiment and uptick across key commodities helped fuel an overnight rebound. Reports China is moving closer to lifting lockdowns have helped fuel demand for commodities overnight while supporting a broad improvement in risk sentiment. Oil prices led gains up almost 4% on the day, with key indices up on the day and the AUD extending toward intraday highs at 0.6980. Our attention today turns to the RBA’s meeting minutes. With policy makers electing to raise rates and commence a tightening cycle we are keenly attuned to any insight or forward guidance as to the pace of future rate hikes ahead of labour market wage data. Wage growth will be critical in governing the pace and speed of RBA rate hikes and potentially lend some support to the embattled AUD while at the mercy of the broader risk narrative.
Key MoversAn improvement in the risk narrative overnight helped fuel a choppy recovery across key equity indices, while forcing US 10-year rates lower and the USD off recent highs. Weaker China data prompted an uptick in risk aversion through the latter half of the Asian trading session helping push the DXY toward recent highs, recouping much of Friday’s late sell off. Having found momentum, the USD then gave up gains as risk sentiment improved on a rebound in oil prices and expectations China may be in a position to lift restrictions. The Euro edged back above 1.04 to mark highs at 1.0445 while the Great British Pound enjoyed an extension through 1.23 touching intraday highs at 1.2330. Having enjoyed a brief respite in USD upside and a small improvement in risk sentiment our expectations support near term gains for the world's base currency. Despite signs China may lift restrictions, officials' ability to control further Omicron outbreaks remains in question cast a cloud over the Chinese economic outlook through 2022, while the conflict in Ukraine and the threat of a Natural Gas standoff between Russia and Europe threaten to derail the European recovery eliminating any possibility the activity gap between the US and other major economies will close. Despite having extended beyond our initial fair value estimates the USD remains poised to enjoy further upside through the medium term as current headwinds remain in play.
Our attention tonight turn to US retail sales and commentary from ECB president Lagarde and Fed chair Jerome Powell.
- AUD/USD: 0.6880 - 0.7050 ▲
- AUD/EUR: 0.6620 - 0.6730 ▲
- GBP/AUD: 1.7580 - 0.7820 ▲
- AUD/NZD: 1.0980 - 1.1120 ▼
- AUD/CAD: 0.8880 - 0.8990 ▼