1st March 2022 - AUD trading at around 0.7250 ahead of RBA’s decision

Market Headlines

The Ukraine war weighed on US and European equities, the S&P500 currently down 0.7%. Bond yields fell, and the defensive US dollar rose, although commodity currencies performed well.

The US dollar index is up 0.2% on the day. EUR rose from 1.1150 to 1.1246. USD/JPY fell from 115.60 to 114.90. AUD rose from 0.7175 to 0.7264. NZD rose from 0.6680 to 0.6777. AUD/NZD slipped from 1.0745 to 1.0708. US 2yr treasury yields fell from 1.50% to 1.43%, the 10yr yield from 1.92% to 1.86%. Markets continue to fully price a 25bp hike in March. Australian 3yr government bond yields (futures) ranged between 1.57% and 1.63%, while the 10yr yield ranged between 2.14% and 2.21%. The first RBA rate is fully priced for July 2022.

Commodities: Brent crude oil futures rose 3.1% to $101, copper fell 0.3%, gold rose 0.5%, and iron ore rose 3.5% to $138.

US trade deficit in January widened to, another record, -USD107.6bn (est. -USD99.5bn, prior -USD100.5bn), as imports rose +1.7%m/m and exports fell 1.8%m/m. Wholesale inventories rose +0.8%m/m (est. +1.0%m/m). Chicago PMI fell to 56.3 (est. 62.3, prior 65.2) - the lowest level since August 2020. Dallas Fed manufacturing survey rose to 14.0 (est. 3.5, prior 2.0). Although business activity, new orders and outlook picked up; employment, hours worked, and wages fell. EU harmonised CPI rose to 7.5%y/y (est. 7.0%y/y, prior 6.2%y/y), core CPI to 3.0%y/y (prior 2.4%y/y).

Overnight Currency Range

AUD/USD 0.7152 0.7264

EUR/USD 1.1121 1.1247

GBP/USD 1.3309 1.3431

USD/JPY 114.80 115.80

NZD/USD 0.6656 0.6777

USD/CAD 1.266 1.2810

USD/CNH 6.3072 6.3275

AUD/JPY 82.28 83.69

AUD/NZD 1.0712 1.0755

AUD Thoughts

AUD/USD is firm on the day despite the risk associated with the Ukraine crisis. Instead, AUD is benefiting from prospects of an inflationary environment and prospects of higher commodity currencies. At the time of writing, at 0.7250, AUD/USD is up by 0.27% and has been within a range of 0.7157 and a high of 0.7264.

Looking around, it is a risk-off day in financial markets as the first round of peace talks concluded at the Ukraine-Belarus border on Monday without a ceasefire. Ukrainian cities including Kharkiv in the east were continuing to face some of the heaviest shelling of the war thus far, with reports of significant civilian casualties. The weekend headlines sent forex into a tailspin with big opening gaps due to the news of further, stringent sanctions on Russia from the West. AUD/USD tumbled following reports Russian President, Vladimir Putin, ordered that nuclear deterrent would be put on high alert. AUD lost come 60 pips in the opening gap but has since recovered those and has gone on to gain over 30 pips over Friday's closing price.

AUD/USD peaked at 0.72645 overnight after earlier trading to a low of 0.7152 yesterday morning. Offering interest shout materialise as we approach 0.73c while demand rest back toward 0.7150

Event Risk Data Today

Aust: A softer gain in CoreLogic’s home value index is anticipated for February given the signs of slowing in Sydney and Melbourne (f/c: 0.3%). Meanwhile, the surge in turnover value points to robust gains in total housing approvals in January (f/c: 5.0%); investor loans are expected to outperform owner occupier loans slightly (f/c: 4.5% and 5.5% respectively). The current account surplus is set to narrow in Q4 with weaker export earnings reducing the trade surplus (f/c: $13.5bn); Markets therefore expects net exports to subtract 1.0 percentage points from GDP growth in Q4. Public demand should be supported by the ongoing delta response in Q4 (f/c: 1.6%). The RBA will keep rates on hold at their March meeting; focus will be centred on any shift in rhetoric concerning the timing of the tightening cycle, which markets expects to begin in August 2022.

Japan: The final estimate for February’s Nikkei manufacturing PMI is due.

China: February’s manufacturing and non-manufacturing PMIs should continue to signal the underlying strength of the economy given COVID-19 concerns and start-of-year seasonality (market f/c: 49.8 mfg; 50.7 non-mfg; 49.1 Caixin mfg)

Eur/UK: Softer net mortgage lending in January should indicate cooling demand for housing in the UK (market f/c: £4.1bn). The final estimate for the Euro Area and UK Markit manufacturing PMIs are due.

US: Construction spending continues to be supported by strength in home building (market f/c: -0.1%). Meanwhile, the ISM and Markit manufacturing PMIs should reflect the strength of the sector despite omicron disruptions (market f/c: 58.0 and 57.5 respectively). The FOMC’s Bostic will discuss business uncertainty and Mester will make opening comments at an inflation conference.

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