Australian dollar buoyed by improved risk appetite

Daily Currency Update

The Australian dollar extended back above 0.70 US cents on Tuesday amid renewed demand for risk following reports China will soon ease lockdown restrictions. Shanghai recorded a third straight day with zero community transmission, a key milestone and important marker allowing officials to begin lifting restrictions. With other provinces reporting declining numbers, there is hope a broader return to normal is now on the horizon. Improved risk sentiment propelled the AUD off intraday lows at US$0.6970 and back above US$0.70, touching intraday highs at US$0.7040. The Asian session advance was underpinned by a slew of stronger than anticipated data sets across Europe, the UK and the US. Outperformance across key macroeconomic measures has helped abate fears of a near-term recession and offers scope for a rebound in activity through H2. A sustained improvement in the underlying risk narrative should help the AUD recover losses suffered through the last 4 weeks, however, risks to the downside remain in play. While Shanghai appears to have halted Omicron’s advance outbreaks in other provinces have not yet been quashed and with a new pocket of infections found in Beijing it is unlikely we will see China enjoy a return to full capacity in the near term. The transmissible nature of the Omicron variant will mean spot lockdowns and restrictions will remain in play until the pressures of COVID-19 ease or China amends its current policy. That said our attentions today turn to a critical quarterly wage price index. Wage growth has been key in shaping RBA policy, as members delay wholesale changes to the monetary policy setting ahead of a sustained improvement in wage data. As inflation pressures rise a lacklustre print will make it difficult for the RBA to raise rates aggressively while a strong read could help extend this week's AUD rally as markets price in a faster pace of RBA rate hikes.