AUD whipsaws in response to US CPI

Daily Currency Update

The Australian dollar sits back near the lower end of recent ranges as the respite in risk aversion failed to extend into the overnight session. The AUD edged back through 0.70 US cents during the Asian session amid evidence COVID-19 case numbers in China were declining. Reports Shanghai has largely controlled its latest outbreak and with case numbers still low in Beijing there are hopes lockdowns will be lifted in the near term. That said, China is unlikely to pivot away from a COVID-zero strategy with research showing that under-vaccination and a lower level of protection from the Omicron variant would mean an extreme fatality rate if the government was to abandon its current strategy. As such, persistent lockdowns will continue to weigh on the Chinese economy and global supply chains well in H2. Having touched highs at US$0.7050, the AUD then whipsawed through the overnight session as markets responded to US CPI data. A surprise to the upside was a blow to those hoping for a deceleration of inflation pressures and prompted an immediate jump in rates. The AUD crashed through US$0.6950 before jumping back above 0.70 US cents and then steadily falling back toward lows at US$0.6930.

With little of note on the domestic docket, the AUD remains at the mercy of broader global trends and the underlying risk narrative. With supports forming at US$0.6915/30 a break below these levels could signal a deeper correction in the near term.