AUD/USD Firms as Attention Shifts to Local Inflation Data

The Australian Dollar is edging higher on Tuesday after posting a steep loss the previous session. Trading conditions are a lot calmer than they were 24-hours ago when risk was clearly off the table.

Although mainland Chinese stocks struggled for direction on Tuesday, we did not see the same volatility as the previous session, pausing the sell-off in the Australian Dollar and giving some short-sellers an excuse to book profits. Nonetheless, volatility could return shortly as the markets waver between gains and losses as COVID fears continue to grip Beijing.

At 09:39 GMT, the AUD/USD is trading .7213, up 0.0032 or +0.44%. On Monday, the Invesco CurrencyShares Australian Dollar Trust is at $71.09, down $0.65 or -0.91%.

Worries Over China Sink the Aussie

The AUD/USD was deep under water on Monday as concerns about the impact of coronavirus lockdowns on Chinese demand sank commodity prices and risk trades in general. The Australian Dollar is particularly sensitive to negative news out of China because the country is its biggest trading partner.

Sharp falls in commodity prices with iron ore – Australia’s biggest export earner – particularly hard hit as China accounts for 70%-75% of the world’s imports of the steel-making ingredient.

“Iron ore demand face immediate headwinds from potential lockdown extensions in Tangshan,” noted CBA analyst Vivek Dhar. “The city is a major steel-making hub, accounting for around 14% of China’s crude steel output.”

Meanwhile, a sharp decline in the Chinese Yuan added to the pressure as investors often use the Aussie as liquid proxies for the Asian currency.

Short-Term Outlook

While Aussie traders continue to monitor the events surrounding the COVID-19 lockdowns in China unfold, the currency will also be tested by domestic data when consumer prices for the first quarter are released on Wednesday, with the market braced for a red-hot report.

The Reserve Bank of Australia’s (RBA) preferred measure of core inflation – the trimmed mean – is seen jumping 1.2% in the quarter taking annual inflation to 3.4%, according to Reuters.

That would be the highest reading since mid-2009 and take inflation above the RBA’s 2%-3% target band, ending years of undershooting and making it hard to justify keeping interest rates at emergency low of 0.1.

Ahead of the consumer inflation data, traders are pricing in a 25 basis point rate hike. However, a jump in annual inflation to 3.4% or higher, should put the RBA on a path to hike by 50 basis points at its June meeting.

Look for volatility in the AUD/USD after the release of the data. Watch for volatile selling pressure if the data comes in on the low side, and expect volatile upside pressure on the currency if the inflation number exceeds expectations.