AUD recovery falters as risk sentiment sours

Daily Currency Update

The Australian dollar fell through trade on Thursday, unable to sustain the weeks upward trajectory amid a risk off tone that enveloped financial markets. Investors appeared reluctant in extending recent gains, instead consolidating positions in the face of growing uncertainty and ahead of next week’s key central bank policy updates. With only anecdotal evidence at hand to date, markets pared expectations the impact of the omicron variant will be minimised, when compared with previous strains, wary of aggressively advancing risk on gains without true scientific evidence. Added uncertainty surrounding the state of the Chinese Property market also forced investors toward haven assets as Kaisa Holdings Group, another larger developer, defaulted on a $400 million bond repayment. While officials have stepped in to curb restrictions imposed on the property market and sought to add stimulus in a bid to contain any contagion event, there are ongoing concerns these failures will spill over into the broader Chinese economy. With investors moving away from risk assets, the AUD gave up highs at 0.7180 shifting toward below 0.7150. Our attentions turn today to US CPI data. This is the last major print ahead of next week’s Fed meeting and a steady rise in price pressures will all but guarantee the Fed announces an accelerated tapering program.

Key Movers

Price action across major currencies was largely contained through trade on Thursday, with the days big movers the Norwegian kroner and Chinese yuan. The Peoples Bank of China stepped in to dampen recent CNY gains after the currency marked a fresh three-and-half-year high when valued against the USD. Policy makers announced an increase in the Foreign Currency Reserve Requirement, prompting a half percent correction and the largest single day decline since June. The USD found support as investors looked to pare recent risk on gains. The dollar index jumped 0.4%, its largest daily appreciation in over a fortnight, while the euro gave up 0.5% and sterling’s struggles continued. Our attentions turn now to an all-important US CPI print. Headline inflation is expected to hit 40-year highs, all but guaranteeing the Fed will need to accelerate the tapering of bond purchases and bring forward its path to Monetary policy normalisation. We expect markets will be wary of extending positions ahead of next week’s Fed and ECB policy updates. A further divergence in outlook could see the common currency test 1.12 and drive broader USD gains.

Expected Ranges

• AUD/USD: 0.7000 – 0.7180 ▼
• AUD/EUR: 0.6250 – 0.6350 ▲
• GBP/AUD: 1.8380 – 1.8620 ▲
• AUD/NZD: 1.0480 – 1.0550 ▼
• AUD/CAD: 0.8980 – 0.9120 ▲