AUD continues to test new lows as USD index surges to 5 year high

Daily Currency Update

The Australian dollar continues to test new lows despite a modest recovery in risk appetite. Equities and risk assets rebounded through trade on Wednesday, recouping some of Tuesday’s dramatic fall as markets seemingly try to take stock and reassess. The AUD edged toward intraday highs at 0.7190 through the domestic session following an upside surprise in quarterly CPI inflation. The headline figure showed prices jumped 5.1% year on year, well above market estimates, while core inflation jumped nearly 1.5% in the quarter and 3.7% year on year. Core inflation has always been the RBA’s preferred measure as it strips out those consumer items highly sensitive to price fluctuation. The 3.7% print is well above the RBA 2-3% target range and prompted markets to bring forward expectations for an RBA rate hike, pricing a 22-basis point adjustment next month. The RBA has been clear that it wants to see a material rise in wages before beginning its tightening cycle. Yesterday’s surprise to the upside puts greater pressure on policymakers to move earlier. Having touched intraday highs at 0.7190 the AUD found added support on optimism surrounding China’s COVID-19 predicament. Hopes an easing of strict lockdown protocols will limit the shock on the domestic growth outlook helped stabilise the CNY. The AUD failed to hold onto gains won during the domestic session tracking lower overnight. Broad-based US dollar strength and continued positioning ahead of the Fed’s expected monetary policy normalisation forced the AUD to touch intraday lows at 0.71 US cents. The AUD remains vulnerable to further downside having marked a series of lower lows in recent days and our attentions remain affixed to global bond rates and the broader risk narrative.