AUD/USD sinks to fresh cycle lows

• AUD/USD extends losses despite a drift lower in the Us dollar.
• RBA uber dovishness finally kicks in and sends AUD off a cliff.

AUD/USD has fallen to fresh cycle lows to meet daily structure in the 0.7260s, sliding from a high of 0.7305. The perfect storm came this week when a stronger US dollar coupled with a dovish Reserve Bank of Australia and hawkish bets on the Federal Reserve fermented 

On Wednesday, UK and US equities were softer as well. AUD, as a higher beta currency, suffered as a consequence due to the inflation concerns that are swelling in financial markets. In the same respect, UK inflation came in stronger than expected while supply constraints weighed on housing starts in the US.

Meanwhile, the US dollar has drifted lower from a new 16-month high that was printed on Tuesday as markets position for rate increases from the Federal Reserve. Money markets are now pricing in a high probability of a Fed rate increase in June, followed by another in November.  CME data suggest a 50% probability of a 25 bps 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 day's range of between 95.734 and 96.241. Yesterday's high was 96.266, the best level marked since mid-July 2020. The dollar's rise has also pushed broader FX market volatility higher, with one gauge rising to an 8-month high of nearly 7%.

RBA uber dovishness

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

The RBA’s estimate of the neutral rate as being 2.5% or higher;

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

The implications of a flat Phillips curve when the RBA does start to lift the cash rate; and

Lowe’s weaker wording around a rate hike in 2024 as “still plausible.”