AUD/USD extends the bullish correction for fresh Asian highs

AUD/USD is perky in mid-day Tokyo as the US dollar is faded following a strong performance at the start of the week. At 0.7226, AUD/USD is 0.56% higher and counting. The pair has rallied from a low of 0.7169 and has reached a high of 0.7228.  

The US dollar has benefitted from a risk-off start this week and it rallied vs. a basket of rivals, as measured by the DXY index. The index hit a two-year high as investors moved away from risk assets in fear of the knock- effect of the Chinese lockdowns pertaining to the covid spread. Not only that, the Ukraine crisis is a dark cloud over markets as are the prospects of rapidly increasing inflation pressures and interest rates. 

''Recent Fed rhetoric is strongly suggestive of a string of back-to-back 50bp hikes so as to get the fed funds rate back to neutral expeditiously,'' analysts at ANZ Bank said. 

''The market is pricing almost 4-straight 50bp hikes at the May, June, July, and September meetings. Fed Chair Powell says markets are factoring in Fed communications and are reacting appropriately.''

As for Ukraine, the Aussie trees as a proxy to the commodity markets and the nation's distance from the conflict had been a positive for the currency initially. However, despite the prospects of higher prices and a trade balance surplus which would be expected to continue supporting AUD, the commodity market is also absorbing China’s growth concerns with energy and metals facing some considerable bearish momentum. For instance, Iron ore, Australia’s main export, plunged below $140/t at the start of the week.

''Tangshan is under lockdown, which is a key concern for steel production. Investors are also reassessing the impact of infrastructure investments on the property market. Property indicators are still negative, while construction activity is slowing due to lockdowns,'' analysts at ANZ Bank explained. 

Another troubling feature in the FX space is the yen sinking to a 20-year low against the US dollar last week. There has been some relief this week but there are concerns over the potential volatility this could cause in US Treasury markets and more broadly global financial markets which could hurt the Aussie for its high beta status to equities.  

AUD/USD technical analysis

Bulls step in and a correction towards the prior lows could be on the cards for the days ahead. A 38.2% Fibonacci level through 0.7250 would be a reasonable target for the bulls in the first instance, mitigating some of the price imbalance left behind from the daily sell-off.