Risk sentiment remained fragile, with Ukraine and Fed tightening the main concerns. The S&P500 is currently down 0.7%, bond yields are mixed, and the AUD and NZD are higher. The FOMC minutes just released are pushing the USD slightly lower. US retail sales in January beat expectations, rising 3.8%m/m (est. +2.0%, prior revised to -2.5%m/m from -1.9%m/m). Industrial production was also stronger than expected, rising 1.2%m/m (est. +0.5%m/m), with capacity utilisation rising to 77.6% (est. 76.8%). The NAHB homebuilder sentiment survey was as expected at 82 (prior 83). The housing market appears to be consolidating at high levels.
The FOMC minutes from the January meeting noted that inflation was high and policy tightening was warranted soon, adding:” Most participants noted that, if inflation does not move down as they expect, it would be appropriate for the Committee to remove policy accommodation at a faster pace than they currently anticipate”. On its holdings of bonds:” The Committee expects that reducing the size of the Federal Reserve's balance sheet will commence after the process of increasing the target range for the federal funds rate has begun”.
Eurozone industrial production in December was boosted by strong capital goods production. Headline production rose +1.2%m/m and +1.6%y/y (est. +0.3%m/m and -0.5%y/y). UK CPI inflation in January was -0.1%m/m and +5.5%y/y (est. -0.2%m/m and +5.5%y/y), with core at +4.4%y/y (est. +4.3%y/y).
The US dollar index is down 0.2% on the day. EUR rose from 1.1345 to 1.1395. USD/JPY fell from 115.79 to 115.38. AUD rose from 0.7160 to 0.7186. NZD rose from 0.6640 to 0.6678. AUD/NZD ranged between 1.0761 and 1.0797 – a high since June. US 2yr treasury yields fell from 1.58% to 1.53%, while the 10yr yield ranged between 2.01% and 2.05%. Markets continue to price some chance of a 50bp rate hike in March 2022. Australian 3yr government bond yields (futures) fell from 1.74% to 1.70%, while the 10yr yield fell from 2.28% to 2.24%. The first RBA rate is priced for June 2022.
Commodities, Brent crude oil futures rose 2.2% to $95, copper rose 0.2%, gold rose 0.9%, and iron ore rose 2.4% to $140.
Overnight Currency Range
AUD/USD 0.7144 0.7204
EUR/USD 1.1345 1.1395
GBP/USD 1.3532 1.3600
USD/JPY 115.355 115.78
NZD/USD 0.6636 0.66895
USD/CAD 1.2665 1.2725
USD/CNH 6.3308 6.3421
AUD/JPY 82.59 83.16
AUD/NZD 1.0760 1.0794
- The AUD/USD extends its gains in the week, so far up 0.78%.
- Increasing tensions in the Russia/Ukraine conflict could not stop the rise of the risk-sensitive AUD.
- Fed’s Kashkari and Harker favour 25 bps “gradual” increases on fear of causing a recession.
AUD/USD in the short-term is upward biased, but it would face strong resistance in the 0.7210-43 area.
During the North American session, the AUD/USD edges higher though barely short of weekly tops amid a risk-off market mood. Failure of de-escalation in the Russia/Ukraine conflict dampened the market mood. Earlier in the European session, European bourses were trading in the green following Tuesday’s news that Russian troops were moving back, as reported by Russian authorities. However, the lack of confirmation by Western officials, led by US Secretary of State Blinken, who on Wednesday said that they continue to see critical Russian units moving towards the border and not away, shifted market participants’ sentiment.
Ukraine President Zelenskiy confirmed the headline above around 17:25 GMT, saying he doesn’t see Russian troops pull back.
Fed’s Kashkary and Harker favour “gradual” interest rates hikes Around 16:00 GMT, Minnesota Fed’s President Neil Kaskari said that the US central bank could soften demand by hiking rates, but that won’t address the supply-side issues. He favours gradual rate hikes, and he sees inflation at 3% by the end of the year, in line with most forecasts. Kashkari sees a risk of recession if the Fed hikes too aggressive.
Later on, the day, Philadelphia Fed President Patrick Harker said he supported a 25 bps increase to the Federal Funds Rate (FFR) in the March meeting. He said that “we need to do what we need to do to curb inflation but not overreact and possibly dampen an economy that is, in some ways, doing very well.” Before Wall Street opened, the US economic docket featured Retail Sales for January. The headline came at 3.8% m/m higher than the 2% estimations, while the so-called core sales, which exclude gasoline and cars, rose by 3.3% m/m, crushing the 0.8% foreseen. Furthermore, US Industrial Production rose 1.4% m/m, better than the 0.4%, and Capacity Utilization jumped 77.6% from 76.60%, the highest jump in December 2021.
At 19:00 GMT, AUD/USD traders turn their attention to the FOMC monetary policy minutes, followed at 23:30 GMT, by the release of the Australian Employment report, which could shed some clues about what the RBA is going to do next.
On Wednesday, the AUD/USD has risen steadily since the beginning of the Asian session. Geopolitical headlines caused a minor dip, though at press time is trading at new daily highs, near the 0.7200 figure. The AUD/USD is neutral biased but upwards in the short-term. The AUD/USD first resistance would be 0.7200. Breach of the latter would expose a three-month-old downslope trendline around 0.7210, followed by the 100-day moving average (DMA) at 0.7243.
Event Risk Data Today
Aust: Balancing the ongoing support from the NSW and Victoria reopening against the omicron outbreak over the summer holidays, the market median for local employment is 0k, with risks to the downside. Participation holding steady at 66.1% should facilitate a fall in the unemployment rate of around 0.2ppt (market 4.2%).
Japan: The emergence of omicron should see capital investment decline in December’s machinery orders (market f/c: -2.0%).
US: Initial jobless claims are set to remain at a very low level (market f/c: 218k). Robust underlying demand for housing should continue to buoy housing starts at a high level in January (market f/c: -0.4%). Meanwhile, the February Phily Fed index will offer a gauge of business activity in the region (market f/c: 20.0). The FOMC’s Bullard will speak on the economic and policy outlook.