Going into the end of the week, AUD/USD was looking to soften up after some solid gains on Tuesday and Wednesday. Then Evergrande made an US$83 million bond coupon payment and market perceptions around risk assets changed course to a degree.

Covid restrictions are easing across Australia with Victoria coming out of one the longest lockdowns in the world. When this happened in Q4 last year, GDP saw a strong pick up.

Commodity volatility has spread with energy prices spilling over into other parts of the commodity complex. Industrial metals rallied hard before easing off into the end of the week.

With energy prices as high as they are, the cost of metal production increases. Additionally, in some parts of the world that are experiencing blackouts, energy rationing can decrease smelting priority. This is on top of supply chain issues as the cost of shipping remains at elevated levels.

Australian 10-year yields continued to rise through the week, faster than their US counterparts. This is depicted via rising yield spreads in the chart below. This spread may continue to play a role in AUD/USD direction.

Australian CPI is due on Wednesday and it would need to be well outside of expectations to alter the RBA policy agenda. At least it might provide interesting information on the impact of lockdowns on economic activity. Market expectation for headline CPI is 3.1% y/y and trimmed-mean CPI at 1.8% y/y.

Producer Price Index (PPI) data is due on Friday and would not normally gain too much attention. However, earlier this month we saw China PPI print at 10.7% y/y against CPI of 0.7% y/y.

Standard economic theory suggests that the high prices businesses pay today are likely to translate into higher prices that their customers pay further down the track. Retail Sales are also due on Friday.

AUD/USD AGAINST AUSTRALIA-US 10-YEAR YIELD SPREAD

(Click on image to enlarge)