AUD/USD surged to highest levels since mid-January in 0.7275 area as risk appetite ramps up

• AUD/USD hit its highest levels since mid-January on Wednesday in the 0.7275 area as risk appetite picked up.
• AUD was only very briefly undermined by weak WPI data, which saw some traders pare back their RBA tightening bets.

AUD/USD surged to its highest level since mid-January in the 0.7275 area on Wednesday amid a broad pick-up in macro risk appetite, with market participants taking the view that US sanctions against Russia announced on Tuesday weren’t quite as harsh as feared. The Aussie, which has been getting tailwinds from buoyant equity markets (S&P 500 futures are up nearly 1.0% in pre-market trade), is now up about 0.8% on the session versus the buck. The brief dip that saw the pair fall to session lows in the 0.7220 area during the Asia Pacific session in wake of softer than expected Australia Q4 Wage Price Index (WPI) data is now well in the rear-view mirror.

AUD/USD is also likely getting a lift from its close correlation to its antipodean counterpart – NZD/USD is up more than 1.0% on the session following Wednesday’s more hawkish than anticipated rate guidance from the RBNZ on Wednesday. The Aussie’s outperformance on Wednesday (it sits in second place in the G10 performance table after NZD) comes despite traders paring back on their RBA tightening bets in wake of the latest WPI figures. The YoY rate of WPI came in at 2.3%, below the expected 2.4%.

“Today's figures support the view that it may take some time to lift wages growth such that the 'norm' becomes a wage rise of 3-4%, rather than the 2% of recent year” said analysts at HSBC. “The RBA is seeking to run the economy hot for a while to try to reset these wage settings norms” they added. But AUD/USD has been undeterred and looks intent on testing earlier annual highs just to the north of the 0.7300 level. One risk to this would be if the Ukraine crisis further escalates, triggering a USD/safe-haven FX bid, potentially sending the pair back towards 0.7200.