AUD steadies as Fed funding expectations fall

Daily Currency Update

The Australian dollar edged upward through trade on Tuesday, climbing back through US$0.6650 amid modest US CPI data and easing fears the US financial system will collapse. Trading conditions remain volatile but signs the worst is over are beginning to emerge. Two- and ten-year treasury rates climbed significantly through trade on Tuesday while key bank stocks recovered, and risk appetite improved. Against this landscape the AUD climbed off intraday lows sought of US$0.6635, seen toward the end of the domestic session, to mark intraday highs at US$0.6695. As trading conditions calmed, and risk appetite improved the AUD found support in shifting Fed funding expectations. US CPI printed more or less in line with expectations yet remains uncomfortably high and affords the policy makers license to continue tightening financial conditions. Future pricing now has a 25-basis point hike priced in next week but beyond this, the likelihood of a pause in April has lifted with just one additional hike priced into May and 50 basis points of easing expected through H2. The shift in peak Fed funding expectations has helped the AUD move off lows south of US$0.66 and opens the door for a longer-run recovery as we move through Q2.
Our attentions remain squarely affixed on the US banking crisis as the health of the US financial system continues to overshadow key macroeconomic data sets. Further calming of contagion fears should help bolster risk appetite and allow the focus to shift back toward macro themes.