AUD/USD remains under pressure as it edges towards 0.69 and the March–April trough near 0.6833, even as the 2-year spread has tightened to 39bp after a retracement of more than 80bp since March. The spot rate has lagged the move in bond spreads, while weaker industrial metals, including iron ore, have added to downside risks. The pair slipped below its 50-DMA, now at 0.7130, and is drifting towards the March low around 0.6850/0.6830; if it rebounds, the week’s high near 0.7020 may cap the upside.
Australian inflation slowed to 4.0% y/y in May from 4.2%, though core inflation accelerated to 3.6% from 3.4%. One more June inflation print is due ahead of the RBA’s August meeting, and money-market pricing has been subdued, with implied odds of a 25bp hike by year-end around 55%; employment data is due tomorrow. Structural flows also remain a headwind: APRA data show offshore equity hedging fell by 0.4pp to 23.2% in Q1, leaving the currency more exposed if Fed pricing stays hawkish.
Divergence and Commodities Weigh on AUD/USD
We are watching AUD/USD continue its slide towards the 0.6830 support zone. The pair is noticeably lagging the sharp tightening in the 2-year bond spread, which has narrowed to just 39 basis points. This kind of divergence, where the currency doesn’t follow interest rate expectations, often signals underlying weakness.
The pullback in industrial metals isn’t helping the situation. Iron ore prices on the Dalian exchange recently broke below the key $100 level, now trading around $98 per tonne. This weighs on sentiment for the commodity-linked currency and puts the March-April lows in jeopardy.
Domestic Data and Structural Flows Add Pressure
Domestic data offers little support, with last month’s headline inflation slowing to 4.0% even as the core rate ticked higher. More importantly, the latest jobs report showed the unemployment rate edging up to 4.2%, suggesting the labor market is cooling. This makes it harder for the RBA to justify another rate hike, keeping a lid on the Aussie dollar.
We cannot ignore the structural selling pressure from Australia’s massive superannuation funds. These funds are continuing to reduce their currency hedges on overseas assets. This effectively means they are selling the Aussie dollar, betting it will weaken further to boost their offshore returns.
This environment, where risk sentiment overrides interest rate differentials, reminds us of early 2020 when fundamentals broke down. For traders, this suggests buying AUD/USD put options to protect against a drop through the 0.6830 support level could be a prudent strategy. The increased volatility makes owning options attractive compared to being short the spot currency.
The path of least resistance appears to be lower for now. If the 0.6830 level breaks, we could see a faster move down. Any rebound in the coming weeks will likely face significant resistance near the 0.7020 mark, which may present an opportunity to initiate new bearish positions.
