Risk off as melancholy mood engulfs financial markets

Daily currency update

The Australian dollar tracked lower through trade on Wednesday as a melancholy mood engulfed markets amid concerns that sustained inflation and sluggish growth will derail the global economic recovery. Equities and risk assets moved lower and the AUD gave up intraday highs at US$0.7235, slipping below US$0.72 to mark session lows at US$0.7175. US 10-year treasury rates punched back above 3% and ensured that the gains won in the aftermath of the RBA policy update were all unwound. Having eyed a break above near term resistance at US$0.7250 the AUD has struggled to maintain upward momentum despite markets pricing a more aggressive path to monetary policy normalisation. The clear signal proffered by the RBA has us pricing in 2 additional 50-point rate hikes and another 25-basis point hike before the year’s end. With the RBA seeking to quell short-term inflation pressure, the pace of adjustment should slow next year. The shift in RBA policy expectations has helped lift AUD rates and erode some of the US dollar’s yield advantage, opening the door for an AUD extension in Q4. With little of note on the local macroeconomic ticket, our attentions turn to Chinese trade data, a critical ECB policy update and US CPI data. Expectations the ECB will announce an end to QE and a plan to lift rates out of negative territory have matured in recent weeks as ECB officials signal an end to emergency policy settings. The ECB policy change and guidance will prove key in shaping AUD/EUR expectations and broader EUR/USD moves, which could afford the AUD some scope to test a break above US$0.7230/50.

Key movers

The Japanese yen was the day’s big mover, underperforming again amid an uptick in US 10-year yields and dovish commentary from the Bank of Japan. Governor Kuroda reiterated policymakers’ commitment to accommodative monetary policy aimed to support sustained and long-run growth while capping inflation pressures below 2%. The divergence in central bank policy expectations helped elevate the USD to fresh 20-year highs, storming through ¥134 to touch highs at ¥134.50, a remarkable feat given the pair was trading nearer ¥115 just 6 months ago. In other news the GBP fell back below US$1.26 and US$1.2550 after the OECD downgraded its economic growth outlook, forecasting stagflation in 2023 if there is no easing in current inflationary pressures. Our attentions turn to the ECB policy update. Despite a rapid rise in inflation pressures in recent months voting members appear adamant about the need for a measured approach, postponing considerations for a rate hike into July. The key question for today will be, “when does the ECB end its QE programme; Immediately or at the end of the month?”. The scope and scale of ECB’s forward guidance will go a long way to shaping the euro direction through the weeks ahead.

Expected ranges

• AUD/USD: 0.7130 – 0.7250 ▼
• AUD/EUR: 0.6650 – 0.6780 ▼
• GBP/AUD: 1.7320 – 1.17520 ▲
• AUD/NZD: 1.1120 – 1.1220 ▲
• AUD/CAD: 0.8980 – 0.9080 ▼