AUD recovery plagued by late surge in risk aversion

Daily Currency Update

The Australian dollar extended its recovery through trade on Thursday, consolidating a break above 0.72 to mark intraday highs at 0.7270. The correction and pullback in global rates, a robust labour market performance and a broad improvement in market appetite for risk, helped lift the currency off intraday lows. Having struggled to extend beyond 0.7210 domestic labour market data helped propel the AUD toward 0.7250. A robust print surprised investors with the unemployment rate falling to a 13-year low at 4.2% while some 64,000 new jobs were added to the economy in December. Of course, this data fails to take into account the strains placed on the labour market through this latest surge in COVID-19 infections as labour shortages continue to hamper critical supply chains and essential workforces. That said, the market appears content in looking beyond these short-term stresses and we fully expect these pressures will improve as this latest wave subsides. Sustained improvement in labour market performance raises questions as to the RBA’s stubborn commitment to keeping cash rates low. With our attentions now drawn to next week’s quarterly CPI inflation print, another strong read should ensure the RBA is forced to end its QE program in February and pivot off its current dovish stance. Having given up daily highs leading into this morning’s open, the AUD currently buys 0.7220 as risk sentiment appears to have soured through the latter stages of the overnight session, prompting a broader risk correction.

Key Movers

The US dollar index advanced on Thursday thanks to a late correction in market appetite for risk. Having relinquished gains early, the DXY slipped below 95.50 as a moderation in global rates and improved demand for equities helped propel a recovery lead by the NZD and AUD. The downturn was however short-lived as sentiment appeared to sour into the close and another late sell-off helped push the DXY toward intraday highs at 95.84. The euro has slipped below 1.1350 and appears set to test a break below 1.13. Commentary from ECB president Christine Lagarde suggests the gap between Fed and ECB policy will widen through the near term. Lagarde was careful to point out the ECB will not act as quickly or as ruthlessly as the Fed given a weaker base of underlying inflation and expectation prices will stabilise moving into the end of the year. With the yield advantage expected to further favour the USD, the single currency will likely come under sustained pressure through the near term as expectations for Fed policy become ever more aggressive. With little of note on today’s ticket, our attentions remain with the broader risk trend and global rate performance in guiding direction into the weekly close.  

Expected Ranges

• AUD/USD: 0.7170 – 0.7270 ▲
• AUD/EUR: 0.6330 – 0.6420 ▲
• GBP/AUD: 1.8690 – 1.8920 ▼
• AUD/NZD: 1.0630 – 1.0730 ▲
• AUD/CAD: 0.8990 – 0.9070 ▲