Australian Dollar Tanks on US Dollar Strength as Inflation and Recession Weigh

Australian Dollar, AUD/USD, US Dollar, China, Fed, Iron Ore, RBA – Talking Points

  • The Australian Dollar is sinking on a surging US Dollar
  • Global recession woes are compounded by China restrictions
  • A hawkish RBA might not be hawkish enough. Will a hike lift AUD/USD?

The Australian Dollar made a 2-year low overnight as demand for US Dollars gathered pace in the face of growing risks to global economic growth.

Tightening monetary policy to battle red hot inflation continues to stoke recession fears while China’s zero-case Covid-19 policy undermines activity in the world’s second largest economy. These headwinds have seen risk assets come under pressure, including the Aussie.

Wednesday will see US CPI released and a Bloomberg survey of economists is anticipating 8.8% year-on-year headline inflation. This would support a 75 basis point hike by the Federal Reserve at their Federal Open Market Committee (FOMC) meeting later this month.

Fed Chair Jerome Powell has recently made it clear when he has spoken at events or in interviews that the bank is focussed on regaining price stability and that may come at a cost to economic growth.

Meanwhile over the weekend, Shanghai reported its first case of the latest highly contagious sub-variant of Covid-19, BA.5 omicron. The knock-on effect of restrictions means that supply chains appear likely to remain snarled for some time, maintaining price pressures for the foreseeable future.

A slow-down in China has seen industrial metal prices tumble with iron ore, Australia’s number one export, down around a third since the early April high. That peak coincided with the top in AUD/USD as shown in the chart below.


Chart created in TradingView

With all of this mind, the forward-looking backdrop for AUD/USD has understandably been questioned by the market. The backward-looking data tells a different story.

Retail sales, job ads and vacancies, private sector credit growth, home loans and building approvals all beat expectations. Then last week, trade data came in at a jaw dropping surplus of AUD 15.96 billion for the month of May, way above the AUD 10.85 billion anticipated.

Australian CPI will be released 27th July and it is shaping up to be a crucial number for RBA deliberations at their 2nd August monetary policy committee meeting. In the current environment, even if the RBA decide to go for an outsized hike, it may not impact AUD/USD.

The upside of a sliding currency is that it will continue to boost the domestic Australian economy at a time when it might be needed, especially if global recession fears are realised.

— Written by Daniel McCarthy, Strategist for

To contact Daniel, use the comments section below or @DanMcCathyFX on Twitter

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