Rising risk of recession weighs heavy on the AUD

Daily Currency Update

The Australian dollar edged lower through trade on Thursday amid rising fears of global recession. Markets have shifted focus away from concerns surrounding inflationary pressures toward a deteriorating global growth outlook. While inflation remains elevated, input data and key markers suggest some stresses are beginning to ease, prompting investors to downgrade the terminal peak for central bank rate hikes. Consumer and business confidence has collapsed and as inflation pressures couple with rising interest rates, there is a real concern the global economy will tip into recession, not good news for the AUD. Commodity prices continue to correct lower as investors adjust expectations for demand, forcing the AUD to give up 0.69 US cents and test intraday lows at 0.6870. Having edged back toward 0.6890 leading into this morning’s open, the AUD has found support on moves below 0.6880, but a consolidated break below this handle could signal a broader correction and test of supports at 0.6820 and 0.6770. Our attentions today sit with Central bank commentators as a host of policy makers from the RBA, BoJ and FOMC hit the wires. As long as market focus remains attached to the global growth outlook, the AUD will struggle to mount any real upward momentum.

Key Movers

There was ample price action across major currencies through trade on Thursday, as lackluster macroeconomic data sets and a rising risk of recession prompted investors to re-assess positions relative to growth and interest rate expectations. The euro crashed back below 1.05 following softer than anticipated Manufacturing and Services PMI data. The monthly measures of business conditions fell across the continent, with French, German and EU area data points all trending downward. Having touched intraday lows at 1.0480, the euro found some support creeping back above 1.05 to trade at 1.0523 on open today. The GBP proved more resilient and while it slipped below 1.22 in the aftermath of the Euro area PMI print, it found support in stable domestic data. UK service and manufacturing data contracted through May, but remains in line with market expectations; these days that’s a win. Climbing back above 1.22, the GBP touched intraday highs at 1.2290, before settling at 1.2260 leading into this morning’s open. With the market focus shifting away from rising inflationary pressures and toward the risk of recession, investors have tempered expectations for terminal interest rates, lowering upper end forecasts. The correction has helped the yen retrace some of its recent losses forcing a 130-point correction in the USD. Our attentions today turn to Japanese CPI data. A print above expectations will make it difficult for the BoJ to maintain its current yield curve control policy and add mounting pressure on policy makers to change course, adding support to the JPY, while a softer read validates BoJ policy and will likely force investors to reassess JPY expectations.

Expected Ranges

• AUD/USD: 0.6830 – 0.6950 ▼
• AUD/EUR: 0.6480 – 0.6580 ▲
• GBP/AUD: 1.7620 – 1.7880 ▲
• AUD/NZD: 1.0950 – 1.1050 ▼
• AUD/CAD: 0.8920 – 0.9020 ▼