10th March 2022 - AUD/USD extends weekly losses and drops below 0.7300

Market Headlines

Risk sentiment was helped by reports of Ukrainian diplomacy and oil talks. The S&P500 is currently up 2.5%, the safe-haven USD is lower, and oil prices fell. Bond yields continued to rise.

The US dollar index is down 1.2% on the day. EUR rose from 1.0910 to 1.1095. USD/JPY ranged between 115.56 and 115.94, the defensive yen underperforming. AUD rose from 0.7280 to 0.7337. NZD rose from 0.6800 to 0.6853. AUD/NZD rose from 1.0680 to 1.0720.

US 2yr treasury yields rose from 1.60% to 1.68% (highest since Dec 2019), while the 10yr yield rose from 1.85% to 1.92%. Markets fully price a 25bp hike in March. Australian 3yr government bond yields (futures) ranged between 1.76% and 1.80%, while the 10yr yield rose from 2.30% to 2.37%. The first RBA rate is priced for June 2022.

Commodities, Brent crude oil futures fell 9.6% to $116, copper fell 3.8%, gold fell 3.3%, and iron ore fell 3.0% to $156.

Overnight Currency Range

AUD/USD 0.7264 0.7337

EUR/USD 1.0890 1.1095

GBP/USD 1.3091 1.3187

USD/JPY 115.55 115.94

NZD/USD 0.6797 0.6852

USD/CAD 1.2804 1.2894

USD/CNH 6.3184 6.3302

AUD/JPY 84.00 84.98

AUD/NZD 1.0673 1.0715

AUD Thoughts

AUD/USD is correcting a rally that started at the start of the European session as global commodity prices have steadied after their recent surge while investors sought some sense of how long the Russian-Ukraine conflict might last. At the time of writing, AUD/USD is trading at 0.7317, up some 0.70% and has travelled in a range of between 0.7264 and 0.7337.

There are hints that Russian President Vladimir Putin and Ukrainian President Volodymyr Zelensky may be tentatively opening themselves to a compromise. In an ABC TV interview at the start of the week that only really made traction on Tuesday in financial markets, sparking a massive risk rally, Ukrainian President Volodymyr Zelensky again called on Russian President Vladimir Putin for dialogue. Zelensky was stressing that Ukraine is ready to talk and seek compromises, but is not ready to capitulate.

As a consequence, US stocks are bouncing on Wednesday, after four straight sessions of losses, encouraged as Russia announces a new ceasefire in Ukraine to let civilians flee besieged cities. The Dow Jones Industrial Average jumped more than 2.5% to 33,441.35, with the S&P 500 higher by over 2.8% to 4,291.57, and the Nasdaq Composite higher by over 3.5% up to a high of 13,745.86.

An additional factor that has put the brakes on the Aussie comes in an easing for commodity prices that had otherwise contributed to surging inflation. Price gains in other commodities like iron ore which accounts for around 35% of Aussie exports, copper and aluminium and agricultural commodities imply a significant improvement in Australia’s terms of trade and its surpluses. Coal, liquefied natural gas (LNG) and petroleum have all been rallying as well and these made up around 28% of Australia’s goods exports in 2021

However, commodities, and specifically the energy market, has been hammered on Wednesday. Brent crude was down 12.8%, at $112.97 a barrel, after earlier falling to as low as $105.91. US West Texas Intermediate fell 18%, to $103.98, both dropping from their highest since 2008. Investors have taken the view that the US ban on Russian oil will not worsen a supply shock.

Meanwhile, the Reserve Bank of Australia (RBA) Governor Philip Lowe warned that the jump in commodity prices would likely lift inflation further and could feed through to wage claims. However, he reiterated that RBA had scope to be patient on hiking interest rates, and it was plausible a move would come later this year.

AUD/USD traded in a 0.72645/0.7337 range overnight and was helped by the broad shift in risk sentiment. Demand remains staggered to 0.7150 while offering interest should materialise around the recent highs of 0.7440.

Event Risk Data Today

Aust: MI inflation expectations should remain elevated in March, reflecting the lift in official CPI estimates.

NZ: Card spending is anticipated to decline in February as the surge in omicron cases reduces hospitality expenditure (f/c: -0.4%).

Eur: The ECB is expected to leave policy unchanged; focus will be centred on their updated forecasts and the Council’s views on current risks surrounding inflation and geopolitical tensions.

US: The persistence of price pressures should continue hold consumer inflation at 40-year highs in February (market f/c: 0.8%mth; 7.8%yr). Meanwhile, initial jobless claims will likely remain at a very low level (market f/c: 219k).

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