AUD collapses as risk appetite sours ahead of US CPI data

Key Movers

The US dollar outperformed all major counterparts through trade on Monday, surging on the heels of elevated risk aversion and a correction in the European yield expectations. Market uncertainty reached fever pitch Monday as investors looked to dump risk assets driving the S&P 500 and Euro Stoxx 600 lower and dragging key growth correlated currencies downward. Rising Covid case numbers in China and the emergence of the highly contagious Omicron sub-variant, coupled with concerns Europe’s energy crisis will only worsen weighed on investors. Reports Germany is preparing a contingency plan to accommodate electricity rationing should Russia refuse to re-open the Nordstream gas pipeline after scheduled maintenance later this month drove sharp declines across European assets. The introduction of energy rationing will all but cripple the German economy, ensuring the ECB will remain well behind the Fed in normalizing monetary policy as the risk of stagflation looms large. While the US dollar index jumped almost 1% marking fresh multi decade highs the Euro slumped to session and 20 year lows at 1.0053 and appears set to break below parity. The question now, how far will the single currency fall?

In other news the Japanese Yen marked a 24 year low following the weekend election result. The LDP’s ability to increase their majority in the House is seen as tacit support for the Bank of Japan’s ultra-accommodative monetary policy program, ensuring the gap between Fed and Bank of Japan monetary policy platforms continues to widen. The USD surged to highs above 1.3750 touching 1.3775.

With little headline data due through trade on Tuesday our focus remains with US CPI data Wednesday as the key marker for direction through the latter half of the week.