Risk off backdrop forces AUD/USD back below US$0.67

Daily currency update

The Australian dollar drifted downward through trade on Monday, sliding back below US$0.67 as investors adopted a cautious tone to start the week.  Protests broke out across China at the weekend, in response to Government official’s introduction of new lockdown restrictions. As Covid Case numbers rise authorities implemented new social distancing measures sparking unrest among citizens desperate for a reprieve. While the protests have been quashed under heavy police presence, markets appear caught between the negative near-term growth consequences of new lockdown restrictions and the promise of an end to Covid-zero policy. Uncertainty in China prompted weakness in the CNY, weakness that has spilled over to weigh on the AUD. Having given up US$0.67 the AUD marked overnight lows at US$0.6640. Having enjoyed a near 10% surge since marking lows below US$0.62 in early October the AUD has struggled to extend beyond resistance at US$0.6750. We anticipate markets will consolidate positions through the week and in the lead into Friday’s all-important US non-farm payroll print. With little of note on the domestic macroeconomic ticket attentions turn to key CPI inflation data from Europe and a US consumer confidence update.

Key movers

Price action across major currencies has been largely contained to state the week as investors balance near term headwinds against longer run expectations for a broader global economic recovery. Uncertainty in China and the subsequent depreciation in the Chinese yuan spilled over into key commodities, leaving currencies with the AUD, NZD and CAD all drifting lower. The euro enjoyed an early upturn north of 1.05 before giving up gains while the Japanese yen, despite higher global rates, outperformed amid a risk off backdrop. Our attention now turns to German, Spanish and Euro area CPI updates. We anticipate a sharp decline in monthly inflation pressures, however the cumulation of annual price rises is likely to remain above 10% and remains a crucial marker in governing near term ECB policy expectations. With inflation well above target an upside surprise will all but force policy makers to issue another 75-point hike while a downside shock could afford policy makers the excuse to slow the pace of adjustment and issue a 50 point adjustment. With analysts split on the result and the likely impact on ECB policy making we anticipate significant volatility leading into and out of the key headline data update.

Expected ranges

• AUD/USD: 0.6580 – 0.6750 ▼
• AUD/EUR: 0.6380 – 0.6480 ▼
• GBP/AUD: 1.7820 – 1.8180 ▲
• AUD/NZD: 1.0720 – 1.0820 ▼
• AUD/CAD: 0.8920 – 0.9050 ▼