AUD succumbs to stronger USD and risk off profile
Tuesday 19 April, 2022
Daily Currency UpdateThe Australian dollar fell over the Easter long weekend, sinking below 0.7350 US cents on the heels of a stronger USD and softening in demand for risk. Equity markets and risk correlated currencies have come under pressure amid rising inflation concerns and Fed rate hike expectations. Having eyed a break below 0.74 leading into last weeks close the AUD shifted sharply lower through Monday as investors price in a 50-basis point rate hike from the Fed and rising cost of goods. Oil prices jumped sharply over the weekend as Libya shut off its largest oil filed, exacerbating existing supply constraints, while concerns surrounding the Chinese growth outlook linger. Approximately 400 million citizens are now in lockdown (either full or partial) impacting 40% of national GDP output. With policy makers continuing to push a COVID zero policy the economic impact is growing ever larger, amplifying global supply chain issues and driving an extension in inflation expectations. Having touched 0.7660 following the RBA’s latest policy announcement the AUD has succumbed to a shift in the global risk narrative and burgeoning gap in the pace of central bank monetary policy change. We expect liquidity will return to normal as markets resume trade after the Easter long weekend with our attentions affixed to further commentary surrounding the pace and timing of Fed rate hikes and investors appetite for risk.
Key MoversThe US dollar is broadly stronger, advancing amid a risk off profile and rising expectations for a 50-basis point fed rate hike. Bond Yields have risen sharply over the last 2 weeks as markets price in a significant monetary policy tightening following a sustained string of hawkish commentary from key Fed officials. New York Fed John Williams, who is typically aligned with the Fed and FOMC chair Jerome Powell, fueled speculation a faster tightening is on the table suggesting a 50-basis point hike was “a very reasonable option”. His comments all but guarantee the Fed will accelerate the pace of rate hikes next month, highlighting the growing gap between the Fed and other major central banks. The Euro slipped below 11.08 late on Thursday and remains under pressure opening this morning at 1.0781. The single currency tumbled after the ECB failed to meet market expectations. While affirming bond purchases will end in Q3 they failed to put a end ate or set out a plan for rate hikes other than highlight any adjustment would be gradual. With markets pricing in a more definitive monetary policy profile the ECB failed to provide any clear longer-term guidance instead kicking the can down the road suggesting June’s policy meeting will be key in reassessing forecasts and guiding policy. Markets pared back ECB rate hike expectations pricing in now a less than 50% chance for a July rate hike.
With little of note on today’s ticket our attentions remain with rising global inflation concerns, the broader risk profile and bond performance.
- AUD/USD: 0.7290 - 0.7480 ▼
- AUD/EUR: 0.6780 - 0.6850 ▼
- GBP/AUD: 1.7650 - 1.7820 ▲
- AUD/NZD: 1.0880 - 1.0950 ▼
- AUD/CAD: 0.9230 - 0.9330 ▼