Aussie jumps on US recession jitters

The Australian dollar has started off the week with strong gains. AUD/USD is up 0.76%, trading at the 71 line.

Australia’s election was a tightly contested affair, and in the end, Labour’s Anthony Albanese emerged the winner and replaces Scott Morrison as prime minister. The Australian dollar is up sharply today, but that is more a story of US dollar weakness, due to fears of a recession in the US, rather than newfound strength in the Aussie.

Albanese campaigned primarily on economic issues, but the success of the new government will depend greatly on how well China’s economy performs. China is Australia’s number one trading partner, and the current slowdown in China has hurt Australia’s export-reliant economy. China has rigidly adhered to a zero-Covid policy, and the massive lockdowns which have been imposed have hurt the economy and caused serious disruptions to global supply chains.

The US economy has been performing well, but there are growing fears that the economy is headed into a recession and that aggressive tightening by the Fed could end up being a mistake. Fed Chair Powell has assured the markets that he can guide the economy to a soft landing, but the naysayers will be voicing their doubts until Powell can deliver on lower inflation without the economy stalling. It wasn’t all that long ago that the same Powell was assuring the markets that inflation was transient, and by the time he “retired the T-word”, it was painfully clear that the Fed was way behind the inflation curve.

With the Fed signalling that it will deliver supersize 0.50% rate hikes at June and July meetings, the markets will be looking for an inflation peak sometime in the summer. If that peak is nowhere to be found, the Fed will have to adjust its tightening plans and that could translate into volatility in the financial markets.

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AUD/USD Technical

• AUD/USD tested resistance at 0.7118 earlier today. Above, there is resistance at 0.7196
• There is support at 0.6996 and 0.6918

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