AUD recovers as inversion in US yield curve points to recession

Daily currency update

The Australian dollar outperformed through trade on Monday, recovering Friday’s post US non-farm payroll sell off, extending back toward 0.70 US cents. With little headline data flow on hand markets looked passed headlines suggesting China will extend military exercises around Taiwan and instead focused on US economic fortunes and Fed policy expectations. Having digested Fridays stronger than anticipated US non-farm payroll print markets looked beyond the immediate policy implications toward medium term recession fears. The steady inversion of the 2 year vs 10 year yield curve and a further widening in yield spreads suggest the world’s largest economy will plunge into recession before Q1 2023. Extending through 0.70 the AUD touched intraday highs at 0.7010 before slipping lower into this morning’s open where it currently buys 0.6980 US cents. Conflicting drivers continue to ensure the AUD remains range bound, struggling to extend beyond resistance at 0.7050 yet supported on moves below 0.69. With only second tier data on hand we expect the AUD will remain range bound through trade on Tuesday.

Key movers

The US dollar underperformed through trade on Monday, giving up some of Friday’s post non-farm payroll gains as market focus shifted away from near term rate implications toward medium term recession fears. Treasury Yields retreated, giving up the upturn in rates enjoyed on Friday, prompting a further widening in 2 year vs 10 year yields as markets begin pricing in a correction in Fed policy expectations through 2023. Having prepared for a 75 basis point hike next month, investors now expect the Fed’s aggressive program of rate adjustment will kill the economy and force policy makers to unwind rate hikes in H2 next year. The inversion of yield curves now serves as a strong indicator the US economy will be tipped into recession. The questions now is not if but how deep will the recession be. In other news the Euro struggled to take full advantage of Dollar weakness, following reports Norway will be forced to curb electricity export. An exporter in Hydro-generated electricity Norway has elected to curb energy export as its Hydro lakes reach new lows prompting calls for reservoirs to be re-filled rather than stretch supplies to prop up the continents embattled energy market. The report only exacerbates Europe’s Energy crisis leading into Winter and ensured the Euro would trade flat on the day. With little of note on today’s macro ticket our attentions remain with US yield curve adjustments in pricing direction leading into Wednesday all important inflation print.

Expected ranges

• AUD/USD: 0.6880 – 0.7050 ▲
• AUD/EUR: 0.6750 – 0.6890 ▲
• GBP/AUD: 1.7220 – 1.7480 ▼
• AUD/NZD: 1.1050 – 1.1150 ▲
• AUD/CAD: 0.8930 – 0.9030 ▲