AUD succumbs to stronger USD and risk profile

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Daily Currency Update

The Australian dollar fell over the Easter long weekend, falling below 0.7350 US cents on the heels of a stronger dollar and weaker demand for risk. Equity markets and risk-correlated currencies came under pressure amid rising inflation concerns and Fed rate hike expectations. After eyeing a break below 0.74 ahead of last week’s close, the AUD fell sharply through Monday as investors priced in a 50bps rate hike from the Fed and a rise in the cost of goods. Oil prices jumped sharply over the weekend as Libya shut down its largest oil field, exacerbating existing supply constraints, while concerns over China’s growth prospects persist. Around 400 million citizens are currently in lockdown (totally or partially), impacting 40% of national GDP output. As policymakers continue to push for a zero COVID policy, the economic impact is growing, amplifying global supply chain issues and causing inflation expectations to expand. After touching 0.7660 following the RBA’s latest policy announcement, the AUD succumbed to a shift in the global risk narrative and a widening gap in the pace of central bank monetary policy change. We expect liquidity to return to normal as markets resume trading after the Easter long weekend, with our attention on further comments regarding the pace and timing of Fed rate hikes. and investors’ appetite for risk.

Key Movers

The US dollar is stronger overall, rising amid a risk aversion profile and rising expectations for a 50 basis point federal rate hike. Bond yields have risen sharply over the past 2 weeks as markets price in significant monetary policy tightening following a series of hawkish comments from top Fed officials. New York Fed John Williams, who is generally aligned with Fed and FOMC Chairman Jerome Powell, has fueled speculation that faster tightening is on the table, suggesting that a 50 bp hike in base was “a very reasonable option”. His comments all but guarantee that the Fed will pick up 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 Thursday and remains under pressure opening this morning at 1.0781. The single currency fell after the ECB failed to meet market expectations. While saying bond buying will end in the third quarter, they failed to halt or lay out a rate hike plan other than to stress that any adjustment would be gradual. As markets assessed a more definitive monetary policy profile, the ECB failed to provide clear longer-term guidance instead of kicking the road, suggesting that the June policy meeting will be key to reassess forecasts and guide policy. Markets have reduced ECB rate hike expectations, now pricing less than a 50% chance of a rate hike in July. With little to comment on today’s post, we remain mindful of growing global inflation concerns, the broader risk profile and bond performance.

Expected ranges

  • AUD/USD: 0.7290 – 0.7480 ▼
  • AUD/EUR: 0.6780 – 0.6850 ▼
  • GBP/USD: 1.7650 – 1.7820 ▲
  • AUD/NZD: 1.0880 – 1.0950 ▼
  • AUD/CAD: 0.9230 – 0.9330 ▼
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