AUD vulnerable to broader asset market volatility

AUD - Australian Dollar

The Australian dollar opens higher this morning having reversed Friday’s month end sell off to climb back above 0.7750 US cents. The AUD tracked sideways for much of the domestic session bouncing between 0.7705 and 0.7730 before softer than anticipated US manufacturing data and a correction in US 10-year treasury yields forced the worlds base currency lower. The dollar index gave up three tenths of a percent allowing the AUD to mark new intraday highs at 0.7765.

Our attentions now turn to todays RBA policy announcement. While we anticipate the RBA will maintain its current policy setting, they will most likely reiterate a commitment to accommodative monetary policy through 2022 and 2023. With inflation pressures through Q1 falling behind expectations there is very little impetus for the RBA to bring forward it schedule of tighter monetary policy. A dovish RBA could see the AUD give up gains against key crosses like the NZD and Euro while on going asset market volatility and inflated US treasury yields will continue to keep topside gains in check.

Key Movers

The US dollar failed to hold onto the gains enjoyed on the back of Fridays month end rebalancing slipping against most major counterparts amid softer ISM manufacturing data and a drop in US treasury yields. The dollar index is down 0.35% Monday after the ISM manufacturing index unexpectedly fell off multi year highs after purchasing managers reported consistent inflationary pressures and an inability to keep up with demand thanks to pandemic induced constraints to supplies. The softer than anticipated print when coupled with a correction in 10-year treasury yields forced the dollar lower against the Euro, GBP and JPY. While the Euro and JPY showed only modest gains Sterling pushed back through 1.39 bucking the usual seasonal downturn. Traditional the GBP struggles through May, contracting through the month for each of the last 11 years. Having started the month on a positive note amid easing restrictions and an ongoing vaccine rollout there is some optimism Sterling could grind higher. Our attentions turn to Thursday Bank of England policy announcement. We expect they will remain on hold yet acknowledge a faster than projected economic recovery to date. A hawkish surprise could help force the GBP beyond resistance at 1.40.

Expected Ranges

AUD/USD: 0.7680 - 0.7830 ▲

AUD/EUR: 0.6380 - 0.6450 ▲

GBP/AUD: 1.7780 - 1.8020 ▲

AUD/NZD: 1.0680 - 1.0820 ▲

AUD/CAD: 0.9470 - 0.9590 ▲