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AUD buoyed by improved risk tone

Friday 26 August, 2022

Daily Currency Update

The Australian dollar enjoyed a modest upturn through trade on Thursday, largely thanks to an overall improvement in the underlying risk tone. Having tested a break toward intraday lows at US$0.6880 the AUD climbed through US$0.69, marking intraday highs marginally below US$0.70. With little note on the domestic ticket to drive the upswing, the AUD found support in a stronger Chinese yuan. The People’s Bank of China (PBOC) surprised markets yesterday by setting a higher than anticipated daily fixing rate, a sure sign the recent rapid depreciation is creating some discomfort. The yuan bounced off two-year lows advancing 0.2% on the day, while a weaker USD helped the AUD extend its 1% recovery. Having touched intraday highs at US$0.6991 the AUD tracked sideways through the latter half of the overnight session as the market sideline any further major bets until after the Jackson Hole Symposium and Monetary Policy update from Fed Chair Jerome Powell. We expect Powell will drive home the Fed’s commitment to controlling inflation, promising additional rate hikes and erring on the side of moving too far and unwinding rather than letting inflation become entrenched.

Key Movers

The US dollar edged marginally lower through trade on Thursday, giving up 0.2% when measured against a basket of major counterparts following a general improvement in the underlying risk narrative. A correction in US treasury yields forced the dollar back below ¥137 against the yen while the euro poked its head above parity before settling lower leading into this morning’s open. Despite hawkish commentary from Federal Open Market Committee (FOMC) policy makers George, Bostic and Bullard, investors looked to close out short positions, reversing recent gains and squaring positions ahead of Jerome Powell’s commentary this evening. The euro advanced following the release of the European Central Bank (ECB) meeting minutes, revealing that a broader European recession won’t prevent policy makers from lifting rates to control inflation. Given the drivers behind the surge in price pressures, namely elevated gas prices, there is a concern a recession won’t naturally force a downturn in inflation. The central banks must continue tightening financial conditions to avoid price increases entrenched within the euro economy. The market is now pricing a 100-basis point of hikes through the next two policy meetings, including a possible 75-point hike next month. Next week’s CPI inflation report will be crucial in guiding near-term policy expectations. The upswing in rate expectations will likely add little support to the embattled single currency as markets look beyond near-term yields to the longer economic outlook. We turn our attention today to the Jackson Hole Symposium on monetary policy and commentary from Fed Chair Jerome Powell.

Expected Ranges

  • AUD/USD: 0.6880 - 0.7050 ▲
  • AUD/EUR: 0.6880 - 0.7020 ▲
  • GBP/AUD: 1.6880 - 1.7120 ▼
  • AUD/NZD: 1.1120 - 1.1250 ▲
  • AUD/CAD: 0.8950 - 0.9030 ▲