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Daily brief: Australian dollar at risk as new week begins, eyes on USD/JPY and intervention threat

Australian dollar at risk following Friday’s Wall Street volatility; higher US inflation expectations opens door to more hawkish Fed and Asia-Pacific economic docket light, watch USD/JPY for intervention.

Source: Bloomberg

Asia-Pacific market briefing

Asia-Pacific markets could be looking at a pessimistic start to the new trading week after volatility struck Wall Street on Friday. The tech-heavy Nasdaq 100 sank over 3 percent as the S&P 500 weakened 2.29 percent. Risk aversion weighed against the sentiment-sensitive Australian dollar as AUD/USD plunged 1.62%. The similarly behaving New Zealand dollar met the same fate.

Looking at the chart below, markets initially found some optimism on softer-than-expected US retail sales. However, this quickly changed course a couple of hours later when University of Michigan (UofM) data crossed the wires. Consumer one-year inflation expectations surged to 5.1% versus 4.6% anticipated. That is likely a problem for the Federal Reserve.

Just a day before on Thursday, US CPI data beat estimates across the board. That report, alongside the UofM data, shows that inflation expectations risk de-anchoring from the Fed’s long-run objective. This can create a continuous loop where consumers do not believe inflation will come down, causing them to act in their best interests to either protect their wages and/or seek out higher-paying roles.

That also has its consequences for businesses, driving up operating costs, and likely leading to price hikes. A look at the two-year Treasury yield shows that the rate surged past 4.5% as traders priced in a more hawkish Fed that will have to bolster its fight against inflation. The US dollar climbed.

Growth-linked crude oil prices weakened as tightening woes dimmed global growth prospects. Gold weakened.

Monday’s Asia-Pacific docket is rather light, placing the focus for traders on general sentiment. Australia’s ASX 200 and Japan’s Nikkei 225 risk following in the footsteps of Wall Street.

Risk-sensitive AUD/USD is vulnerable. Keep a close eye on USD/JPY. The pair touched its highest in 32 years despite efforts weeks ago from the government to intervene. Further action would likely result in yen price action.

Friday’s Wall Street session volatility

Source: TradingView

Australian dollar technical analysis

AUD/USD closed at its lowest since April 2020, exposing the lowest point of that month at 0.5980. Prices also closed under the 61.8% Fibonacci extension level at 0.6206, but confirmation is lacking. Further losses place the focus on the 78.6% level at 0.6113. Positive RSI divergence shows that downside momentum is fading. A turn higher places the focus on the 20-day Simple Moving Average (SMA).

AUD/USD daily chart

Source: TradingView

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This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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