AUD under pressure as fallout from stronger US data continues  

Daily Currency Update

The Australian dollar was again among the worst performers through trade on Monday as the fallout from Friday’s robust US non-farm payroll and ISM services print continues to reverberate across financial markets. With investors in a tailspin the AUD tested a break below US$0.69 marking intraday lows at US$0.6860 before finding support. Investors continue to retrace expectations for Fed policy, unwinding moves initiated through January and in the wake of last Wednesday’s Fed and FOMC policy update. The data has triggered a significant market correction and raised more questions as to the state of the US economy. Key markers suggested the world’s largest economy was barreling headlong into recession, prompting analyst to downgrade Fed rate expectations and begin pricing an end to the current tightening cycle. Friday’s strong data print has flipped that narrative on its head forcing investors to raise expectations for the peak Fed Funds Rate. Across the last 72 hours markets have priced in an additional 25-point hike from the FOMC, lifting the peak rate from 4.9% to 5.15%. In the wake of such turmoil the USD has surged upward, eating into losses suffered through the start of the year. The AUD has given up near 3% since open on Friday relinquishing all gains won through January.

Our attentions turn now to the RBA and its first policy update for 2023. We anticipate they will lift rates by 25 basis points with a bias to further policy tightening in the future. A dovish surprise will likely add more downward pressure on the AUD as market direction is driven by the re-assessment of economic outlooks and monetary policy expectations.