Australian dollar turbulence is increasing, with the currency trading in a widening 450-pip band centered around the 0.67-cent mark in recent weeks. The exchange rate has been swung around by shifts in expectations around tightening cycles at the Federal Reserve and Reserve Bank of Australia, China’s faltering post-COVID lockdown recovery, and subsequent stimulus expectations, the downshift in global growth, Australia’s domestic economic resilience in the face of rising interest rates, and evolving risk sentiment.

We think these gyrations could be taste of things to come in the third quarter. The Australian and global economies have entered a more challenging phase, and markets will face more complex price dynamics. Inflation is proving to be far more “sticky” than many were assuming, and as long as this remains the case, the pressure on central banks to maintain restrictive settings – even in the face of a slowdown – will remain. It is a hard pill to swallow, but an extended period of sluggish growth and higher unemployment might be the price that needs to be paid for inflation to return to target. And while we think monetary tightening cycles are now largely discounted, we don’t feel the constrained macro environment is fully reflected in risk assets.

AUDUSD trading buckets, daily, since 1986