NAB: 0.70 Now A Pivot; Allow For More Time Below In H2 2022

NAB note that “since breaking back below 0.70 on May 9, AUD/USD has closed above 0.70 on 20 occasions and below 0.70 on 10. So, while our contention that forays below 0.70 are likely to prove short-lived and that AUD/USD is happiest inside a 0.70-0.80 range still just about holds, we doubt that the current spell sub-0.70 will be the last in 2022. Of the three key historical drivers of AUD/USD – commodity prices, risk sentiment and interest rates – risk sentiment is currently in the driving seat. Our NAB/BNZ risk index encompassing the VIX (mirroring the fall in the S&P) plus US and Emerging Market credit spreads sits in the lower quartile of its 0-100% range. The immediate issue for AUD is whether risk markets adequately price the risk of global recession as well as having fully accounted for current – and prospective – interest rate levels. If investors are not done with the downside in this respect, AUD/USD can fall through the 0.6829 YTD (2-year) low at some point in H2. Commodity prices, as an AUD-positive factor have lost some of the lustre as markets fret over the ‘demand destruction’ implicit in a significant global slowdown. Yet the absolute level of commodity prices remains consistent with (much) higher AUD/USD levels, which we continue to expect will materialise when the USD starts trending down, but which we currently assume is not before early 2023 at the earliest.”