AUD advances despite rising risk aversion
Daily Currency Update
The Australian dollar closed higher Thursday despite elevated risk aversion and a steep sell off across equity markets and risk assets. The AUD edged toward 0.7030 through the domestic session, buoyed by a stable labour market print. Employment opportunities surged in May, up 60,000, well above expectations. While an uptick in the participation rate ensured unemployment remained steady at 3.9%, a multi decade low. The strong print reinforces expectations the RBA will continue to increase interest rates in 50 basis point increments and adds some support to the AUD, before risk aversion engulfed markets and forced the AUD back below 0.70 US cents. Monetary policy adjustments from the Bank of England and Swiss National Bank sapped markets of risk appetite and drove global equities lower, dragging the AUD to intraday lows at 0.6950. Having found supports, the AUD surged higher through the latter hours of the overnight session following a string of weaker than anticipated US data sets. Housing starts and new build permits fell sharply in May, while mortgage application continued to fall and business confidence indicators fell. Another increase in jobless claims and reports of rising layoffs advanced fears a recession is inevitable. The US dollar plunged in the aftermath as recession fears outweigh safe haven bids, allowing the AUD to pivot above 0.70 and mark intraday highs at 0.7070.All in all it was a wild day across financial markets and we expect volatility will continue as markets continue to adjust to changing data sets.
Key Movers
There was plenty of price action through trade on Thursday, with lumpy moves across key majors dominating headlines into this morning’s open. The dollar index plunged 1.4% following a string of softer than anticipated domestic data sets and rising fears of recession. Housing starts and new build permits fell sharply in May, while mortgage applications continued to fall and business confidence indicators fell. Another increase in jobless claims and reports of rising layoffs added and advanced fears a recession is inevitable. Despite the risk off backdrop and safe haven bid, rising concern for inflation overwhelmed the dollar. Markets have long overvalued the USD and the rising risk of recession may well be the catalyst that prompts a long-awaited downward correction.The Great British pound was the days best performer, lurching higher following the Bank of England monetary policy update. As expected, the MPC increased rates by 25 basis points refusing to follow other major counterparts in supersizing monetary policy adjustments. While the GBP fell in the wake of the announcement, marking lows at 1.2050, the accompanying rate statement helped elevate forward estimates and propelled the currency higher. The Bank left ample room to accelerate the pace and timing of future hikes, while upgrading its inflation forecasts. The committee was at pains to highlight it is “particularly alert to indications of more persistent inflationary pressure and will, if necessary, act more forcefully in response”. This comment bolstered expectations for future rate adjustments and prompted markets to price in a 50 basis point hike at the next meeting and 175 basis point increase to 3% into the end of the year. Sterling surged to intraday highs at 1.24, before edging back to 1.2350 on open this morning.
In other news, the Swiss National Bank unexpectedly raised its policy rate 50 basis points to minus 0.25% in a bid to counter rising inflationary pressures. With further rates hikes signaled, the CHF surged, up over 3% on the day and forcing the USD to lows at 0.9640.
Our attentions today turn to the Bank of Japan. With major central banks tightening monetary policy conditions, we are keenly attuned to any policy response from the BoJ. With the BoJ at loggerheads with the rest of the world, a statement on the weakening yen and the future of its Yield Curve Control platform will be crucial in guiding direction into the weekend.
Expected Ranges
- AUD/USD: 0.6850 - 0.7120 ▲
- AUD/EUR: 0.6630 - 0.6730 ▼
- GBP/AUD: 1.7300 - 1.7750 ▲
- AUD/NZD: 1.1030 - 1.1150 ▼
- AUD/CAD: 0.9000 - 0.9150 ▲