Risk to avoid as melancholic mood pervades financial markets

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Daily Currency Update

The Australian dollar followed a decline in trade on Wednesday as a melancholy mood engulfed markets amid fears that sustained inflation and sluggish growth would derail the global economic recovery. Stocks and risk assets fell and the AUD gave up intraday highs at US$0.7235, slipping below US$0.72 to mark session lows at US$0.7175. US 10-year Treasury yields climbed back above 3% and ensured that gains from the RBA’s policy update were all unwound. After eyeing a break above short-term resistance at US$0.7250, the AUD struggled to maintain its bullish momentum despite markets pricing in a more aggressive path to monetary policy normalization. The clear signal sent by the RBA makes us expect 2 additional rate hikes of 50 points and another hike of 25 basis points before the end of the year. As the RBA seeks to ease near-term inflationary pressures, the pace of adjustment is expected to slow next year. The change in RBA policy expectations helped lift AUD rates and erode some of the US dollar’s yield advantage, opening the door for an extension in the AUD in the fourth quarter. With few remarks on the local macro ticket, our attention turns to Chinese trade data, a critical policy update from the ECB and US CPI data. Expectations that the ECB will announce an end to QE and a plan to raise rates out of negative territory have ripened in recent weeks as ECB officials signal the end of emergency policies. The change in policy and guidance from the ECB will prove key in shaping AUD/EUR expectations and broader EUR/USD movements, which could give the AUD some leeway to test a break above of 0.7230/50 USD.

Key Movers

The Japanese yen was the big mover on the day, again underperforming amid rising US 10-year yields and dovish comments from the Bank of Japan. Governor Kuroda reiterated policymakers’ commitment to an accommodative monetary policy aimed at supporting sustained, long-term growth while capping inflationary pressures below 2%. The divergence in central bank policy expectations helped lift the USD to new 20-year highs, hitting ¥134 to touch highs at ¥134.50, a remarkable feat given the pair was trading higher. nearly ¥115 just 6 months ago. Separately, the GBP fell back below US$1.26 and US$1.2550 after the OECD downgraded its outlook for economic growth, predicting stagflation in 2023 if there is no easing of current inflationary pressures. Our attention turns to the ECB policy update. Despite a rapid increase in inflationary pressures in recent months, voting members seem adamant about the need for a measured approach, postponing considerations for a rate hike in July. The key question for today will be: “When will the ECB end its QE program?” Immediately or at the end of the month? “. The scope and magnitude of the ECB’s forward guidance will go a long way in shaping the direction of the Euro in the weeks ahead.

Expected ranges

  • AUD/USD: 0.7130 – 0.7250 ▼
  • AUD/EUR: 0.6650 – 0.6780 ▼
  • GBP/USD: 1.7320 – 1.17520 ▲
  • AUD/NZD: 1.1120 – 1.1220 ▲
  • AUD/CAD: 0.8980 – 0.9080 ▼
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