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AUD / USD descends to new lows of the cycle

  • AUD / USD extends losses despite a decline in the US dollar.
  • The dovish RBA finally kicks in and sends the AUD off a cliff.

The AUD/USD It has fallen to new lows of the cycle to reach the 0.7260 level, descending from a high of 0.7305. The perfect storm came this week with a stronger US dollar coupled with a dovish Reserve Bank of Australia and aggressive expectations at the Federal Reserve.

On Wednesday, UK and US equities were also weaker. The AUD, as the highest beta currency, suffered from rising inflation concerns in financial markets. In the same vein, UK inflation was stronger than expected, while supply constraints weighed on US home construction.

Meanwhile, the US dollar has fallen from a new 16-month high hit Tuesday as markets position by the Federal Reserve’s rate hikes. Money markets are now pricing with a high probability of a Fed rate hike in June, followed by another in November. CME data suggests a 50% probability of a 25bp rate hike by July 2022.

The dollar index, DXY, which measures the currency against a basket of six rivals, is down around 0.13% at the time of writing, trading at 95,788 within the range of the day between 95,734 and 96,241. Yesterday’s high was 96,266, the best level since mid-July 2020. The rise in the dollar has also raised the volatility of the currency market, with an indicator rising to an 8-month high of almost 7% .

As for the RBA, the markets had bet against the dovish rhetoric of central banks. However, the RBA Board Minutes and Governor Lowe’s speech were very subdued and sent the Aussie off a cliff. Key takeaways from these events, courtesy of ANZ Bank analysts, are as follows:

RBA’s estimate of the neutral rate of 2.5% or more;

The RBA’s willingness to “look through” inflation of 3% or more if it is not accompanied by higher wage growth;

The implications of a flat Phillips curve when the RBA begins to raise the cash rate;

Technical levels

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