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

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

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

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