AUD forced below 0.72 amid higher global rates and broad US dollar strength

Daily Currency Update

The Australian dollar fell through trade on Monday, overwhelmed by a largely stronger US dollar and sustained uptick across global rates. Investors continued to ride Friday’s robust US non-farm payroll report, firming bets for a series of 50 basis point rate hikes leading into September. An uptick in labour force participation, steady unemployment and a flattening in average hourly earnings all helped build a case for the Fed to maintain its aggressive pace of rate hikes, a theory supported by Cleveland Fed Chair Loretta Mester. Mester affirmed her support for a 50-basis point hike in June and July and hinted at a 3^rd 50-point adjustment in September. Having touched intraday highs at 0.7230 the AUD slipped below 0.72 US cents, finding support at 0.7190. Despite the US dollars momentum, the AUD remains relatively well bid as risk aversion declined through trade on Monday. While investors maintain a cautious outlook the further easing of COVID restrictions in China has helped bolster demand for risk. Public Transports, Restaurants and Cinemas will re-open in Beijing allowing citizen to return to the office and rebuild the services economy. Copper and nickel prices surged while Iron Ore tracked higher helping underpin the AUD and stave off a broader downward correction.

Attentions today turn to the RBA’s policy meeting and rate statement. Markets have priced in a rate rise but are divided as to just how aggressive policy makers will be. With calls for 25, 40 and 50 basis point hikes the market is pricing a 33-basis point adjustment suggesting the consensus is split between a 25-point jump and 40-point hike. While a 40-point hike isn’t a standard increment it would mean rates lift to 0.75%, extremely low given the current economic context. A hawkish surprise to the upside could help the AUD extend beyond resistance at 0.7230/50 while a miss to the downside when measured against the recent uptick in US rate expectations could push the AUD back toward supports at 0.7080.