New month same story; AUD downturn continues ahead of key RBA and Fed policy updates

Daily Currency Update

In the context of recent volatility, the AUD enjoyed a relatively quiet start to the week maintaining a narrow trading handle. With little headline newsflow on hand to drive direction the AUD struggled to shake the pall that has clouded risk assets and commodity currencies through recent weeks, edging closer toward 0.70 US cents. Having opened the week above 0.7050 the AUD crept steadily lower through the day marking intraday lows at 0.7030. Risk sentiment remains soft as Chinese officials extend lockdown restrictions to include parts of Beijing in a bid to avoid the same rapid and out of control spread seen in Shanghai. With little sign policy makers are set to move away from a COVID zero policy and Omicron transmissibility making the task all the more difficult we can expect ongoing lockdowns and an extended negative impact on global growth and supply chains.

Our focus now shifts toward the RBA policy update. After last weeks robust inflation print markets have brought forward rate hike expectations pricing in an average increase of 22 basis points. While the majority of analyst see the RBA moving slowly ahead of critical wage date due later this month some hawkish commentators are pricing a 40-point move that would lift rates from 0.1% to 0.5%. With the market now well bid on a series of rates hikes through the rest of 2022 and into 2023 forward guidance plays a critical role in determining near term AUD value. A rate hike and open path to interest rate normalisation could help the AUD climb off recent lows while a miss in the context of market expectations could be the catalyst to drive a break back below 0.70 US cents.