A new day and a new low; AUD plunges under weight of US Dollar

Daily Currency Update

The Australian Dollar plunged through trade on Tuesday, giving up 0.68 US cents amid a surge in demand for the USD as the world’s base currency continues its ascent beyond 20-year highs. The AUD tracked toward intraday highs at 0.6830 leading into the RBA’s policy update before trending lower through the afternoon and unraveling under the weight of a stronger USD overnight. As anticipated the RBA lifted rates by another 50 basis points, but a shift in narrative and omission of a key phrase in the accompanying rate statement prompted investors to adjust expectations for future rate hikes. Policymakers removed the reference to “normalizing monetary conditions” a move markets took to suggest the RBA believes the underlying cash rate is approaching its natural and neutral level. Such suggestions would mean a slowdown in the pace of future hikes and we now look to Governor Lowe for clarity on the RBA’s position. With the market now only pricing a 40% chance of a 50-point hike in October the gap between RBA and Fed policy expectations is set to widen. Having slipped back below 0.68 US cents the AUD was driven toward intraday lows at 0.6730 overnight after a stronger than anticipated US ISM service Index report and a further weakening in the Chinese Yuan. Sustained strength across the US services sector fueled another sell-off in global bonds, driving treasury rates higher and further elevating expectations for aggressive Fed and FOMC policy, while outperformance in USD/CNY and another step toward the psychological 7 handle weighed on the AUD as a key CNY proxy.
Our attentions turn now to domestic GDP data, a Bank of Canada policy update, and central bank commentary from the Bank of England and Federal Reserve.