AUD rallies as currency markets shrug aside risk-off move

Daily Currency Update

The Australian dollar rallied through trade on Wednesday, extending beyond resistance at 0.7150 to test 0.72 US cents. Financial markets remain on edge as new reports suggest tensions between Ukraine and Russia remain at a precarious tipping point. There is little evidence Russia is withdrawing its border forces and in fact appears to be advancing its military build-up, according to NATO’s secretary-general. Russia has refuted such claims, affirming President Putin’s desire for a diplomatic solution. Volatility across financial markets remains intact as analysts and investors attempt to shore up position amidst the uncertainty. Equities and bond rates fell in the face of a risk-off shift, yet the AUD managed to maintain the week’s upward momentum as there was little overflow in the risk-off move. A broad-based USD decline allowed the AUD to mark intraday highs above 0.72 at 0.7205. Our attentions turn now to local labour market data ahead of next week’s all-important wage price print. Strength across the labour market and an uptick in wage pressures will add mounting pressure on the RBA to bring forward policy change and could help push the AUD toward 0.7250/0.73.

Key Movers

Price action across major currencies moved against the broader risk-off trend with the USD DXY index giving up 0.3%, while traditional risk-lead currencies enjoyed strong upside. The inflation theme continued with UK and Canadian CPI data both surprising to the upside. Headline inflation in the UK marked 5.5%— its highest level in 30 years, with next month’s figure expected to print even higher as household energy costs and core food prices continue to rise. Canada’s CPI surged through 5% firming bets for a long series of rate hikes beginning with a 25 basis point hike next month. The pound pushed through 1.3550 to test 1.36 while the CAD eyed a break above 0.79. With markets now pricing broad monetary policy change across major central banks, the momentum behind the USD appears to be faltering. Long-run metrics suggest the currency is overvalued and with inflation in the US outpacing other major economies there is a concern this will act as a handbrake on growth as we move into Q2, 3 and 4. Our attentions today turn to the Fed’s latest FOMC policy meeting minutes, with a key focus on balance sheet reduction.

Expected Ranges

• AUD/USD: 0.7070 – 0.7250 ▲
• AUD/EUR: 0.6280 – 0.6350 ▲
• GBP/AUD: 1.8780 – 1.9050 ▼
• AUD/NZD: 1.0720 – 1.0820 ▲
• AUD/CAD: 0.9050 – 0.9180 ▲