With some US indices approaching correction territory amidst rising monetary and geopolitical uncertainty, it is unsurprising that markets are starting to question the valuation of many high-beta currencies. Taking a look, for example, at AUD and NZD currency crosses will reveal trading ranges that have exceeded four cents within major currency pairs over the past three trading sessions. Volatility within the antipodeans is nothing new, sure, however, the direction of the move despite some key underlying flows reveals good insight into the ongoing high-beta concerns in the wider market.
In Australia overnight, inflation was read at 3.5% year-on-year to the fourth quarter of 2021. If the market was as confident and risk-on as it had been at the start of this year, this would likely have developed rate expectations further and pushed the Aussie Dollar higher. The fact that this morning the Aussie Dollar is still struggling to gain traction against its major peers despite an initial leap higher is indicative of a nervous market.
The vulnerability in high-beta, typically commodity exposed, FX is also surprising given another factor. Since its recent peak early on in January, the Chinese Yuan has gained 1% in a consistent and sustained price shift in favour of the Yuan. That might not sound like a significant move given the type of price adjustments seen elsewhere in the market, however, bearing in mind and reading through the actively managed exchange rate at the People’s Bank of China, it is. The move also brings USDCNY down to its lowest level since 2018.
In this environment of a strong Yuan, the expectation would normally be of a spill over into a stronger AUD and NZD due to the expectation of increased demand from China. AUD weakness in the face of such conditions therefore reveals extremely weak risk conditions that could invite volatility. The risk-off tone has also fed through the Pound and Euro with markets also wary of Italian politics within the latter currency union. The Dollar remains well bid, revisiting the 1.12s versus the Euro seen earlier in the month.
Discussion and Analysis by Charles Porter