AUD steadies as focus turns to domestic labour market update

Daily Currency Update

The Australian dollar tracked sideways through trade on Wednesday as price action across major currencies was largely muted when valued against Tuesday’s post-CPI correction. Having found support on moves approaching US$0.67, the AUD bounced between US$0.6705 and US$0.6750, unable to extend a short run upturn into a more meaningful recovery. Investors' focus remains squarely affixed to US rate expectations, and the majority of analysts are pricing a 75-basis point hike at next week’s Federal Open Market Committee (FOMC) policy meeting. That said, momentum is building behind calls for a full 100-point rate adjustment. Twenty-Five percent of market participants are now pricing in a 1% rate adjustment while upgrading expectations for the peak underlying cash rate, prompting a deeper inversion in the US 2y10y year yield curve and fueling added near-term USD support. We anticipate the AUD will continue to face an extended period of downward pressure as risk aversion, the deterioration in the global growth outlook, a weaker Chinese Yuan and a decline across key commodity prices all weigh on the currency. With supports at US$0.6680/67 still intact, we are eyeing a consolidated break below this handle as a possible marker the AUD is poised to move another leg lower. We now turn our attention to domestic employment data. A strong read indicating sustained labour market tightness will elevate calls for another 50-point RBA rate adjustment and could lend some support to the AUD.