AUD continues to edge higher as USD soft underbelly exposed

AUD - Australian Dollar

The Australian dollar has continued to recoup losses suffered in the wake of last weeks post FOMC meeting panic, extending through 0.7550. Having pushed back through 0.75 on Monday, Tuesday’s advance lacked the same momentum and the upturn appeared to run out of steam on moves approaching 0.7560. Investors seem content in stepping back, assessing recent volatility, absorbing further Fed commentary, and adjusting reflation expectations. Last weeks move seems premature, especially given more measured messaging from Fed officials this week, we expect the AUD will maintain its recovery, slowly edging back toward 0.76 and 0.77. That said, there are now risks to this outlook. The emergence of new COVID-19 variants and a slow global vaccine rollout could mean estimates on the pace of recovery are too optimistic. While we expect exponential growth through the next 12-24 months as the global economy gather momentum, a return to pre-pandemic levels is likely some way off. Our attentions today turn to a host of PMI data sets as possible markers for ongoing inflation.

Key Movers

The momentum behind the USD has faded, with the world’s base currency giving up ground to all major counterparts, excluding the yen. A string of commentary from key Fed officials leaned away from previous hawkish rhetoric and toward a more centrist outlook, suggesting interest rate hikes as “Still quite a ways off” and that the timetable to taper asset purchase will not begin until later this year or early 2022. The comments helped moderate market expectations and, in some sense, ensure price action regains a sense of lucidity. With US treasury rates range bound, we expect the USD will continue to give up last week's gain. The euro extended its recovery toward 1.1950 and sterling punched back through 1.39 to mark intraday highs at 1.3961. Our attentions now turn to a slew of PMI data, a key marker in assessing possible ongoing inflation pressures. We are keenly attuned to changes in input costs. We expect a tentative return to risk assets and a sustained USD correction, yet acknowledge the market remains on edge and there are definite short-term risks that could prompt another risk off rally.

Expected Ranges

AUD/USD: 0.6480 - 0.7630 ▲

AUD/EUR: 0.6290 - 0.6350 ▲

GBP/AUD: 1.8290 - 1.8550 ▼

AUD/NZD: 1.0730 - 1.0820 ▼

AUD/CAD: 0.9270 - 0.9390 ▼