AUD surges on heels of US inflation surprise

Daily currency update

The Australian dollar lurched upward through trade on Wednesday as US CPI Inflation surprised to the downside. Risk appetite surged, driving gains across key equity indices while propelling the AUD through 0.71 US cents. Annual headline CPI fell from 9.1% to 8.5% while core measures that exclude highly price-sensitive items such as food and energy remained steady at 5.9%. The softer than anticipated print forced markets to adjust near-term yield expectations driving 2- and 10-year rates sharply lower. The USD collapsed under the weight of the yield correction tumbling 1.1% allowing the AUD to mark intraday highs above US$0.71 touching US$0.7106 before edging back toward US$0.7080/90 leading into this morning’s open. The moderation in price pressures prompted investors to adjust calls for a 75-basis point rate hike next month, paring Fridays post non-farm payroll surge and splitting bets to accommodate a 50-point adjustment. Moderation in the Fed’s approach to monetary policy could prompt a sustained improvement in risk demand and while the AUD must still contend with a myriad of other headwinds a correction in US dollar expectations could help the currency extend gains leading into Q4. With little else of note on this week’s calendar, our attentions turn to next week’s all-important quarterly wage price update.

Key movers

Having sidelined major bets in the lead into the all-important US CPI inflation update there was ample price action through the overnight session as investors rushed to respond to the softer than anticipated print. While analysts had anticipated moderation in headline price pressures, data surprised to the downside missing conservative estimates by 0.2%. The miss helped propel gains across the S&P 500 and Nasdaq while forcing the USD lower. The dollar’s downturn drove gains across other majors as the euro shot through US$1.03 and the GBP looked set to eye a break above US$1.23. Is this the beginning of a broader market correction? While the correction in price pressures is a welcome relief to consumers and central bank officials, core measures of inflation remain well above target. The Fed has made it perfectly clear it needs to see a sustained improvement in inflation outcomes before it pivots away from its current program of monetary policy adjustment and while the door is open for a 50-point hike next month we anticipate the Fed will continue raising rates at pace through the near term. This latest update provides little insight into how quickly inflation pressures will ease. With the labour market stubbornly strong we expect the Fed will continue with a more aggressive approach, squashing inflation and then unwinding gains to drive a recovery out of recession in 2023. Our attentions turn now to us PPI data and jobless claims, while we expect little impact they could help provide further colour as to labour market strength and the evolving inflation environment.

Expected ranges

• AUD/USD: 0.6980 – 0.7130 ▲
• AUD/EUR: 0.6780 – 0.6880 ▲
• GBP/AUD: 1.7180 – 1.7420 ▼
• AUD/NZD: 1.1020 – 1.1080 ▼
• AUD/CAD: 0.8950 – 0.9120 ▲