21st February 2022 - Focus on geopolitics and Q4 Aussie wage figures next week

Market Headlines

The risk-averse mood in markets persisted, Ukraine and Fed tightening remaining the main concerns. The S&P500 fell 0.7%, bond yields fell, and the defensive USD rose. The US dollar index closed 0.3% on the day. EUR fell from 1.1377 to 1.1315. USD/JPY fell from 115.30 to 115.79. AUD fell from 0.7228 to 0.7165. NZD fell from 0.6730 to 0.6687. AUD/NZD fell from 1.0740 to 1.0711.

US home sales rose 6.7% in January (est. -1.3%, prior -3.8%), to the highest level in 12 months. The median sales price fell 1.2% to $350,300 (all-time high was $362,900 in June), for a y/y gain of 15.4%. The supply of homes for sale remains tight. The leading index fell 0.3% (est. +0.2%, prior +0.7%) – the first fall in 12 months. Weakness was source mainly from jobless claims and consumer confidence.

FOMC member Williams supported a March rate hike, without specifying magnitude, as well as “steady and predictable” balance sheet reduction later this year. He added that waning fiscal support and an improved pandemic response should also help lower inflation. Evans said policy is "wrong-footed and needs substantial adjustment". He continues to believe that much of the price pressures are due to "unusual supply-side developments related to the Covid-19 shock" but also worries about the broadening and persistence of inflation that "requires a substantial repositioning of monetary policy."

US officials said the chances of averting war are "dim" and an invasion can be expected within days, according to the WSJ. There were further reports of shelling in the Donbas region, as well as the partial evacuation of citizens. Eurozone consumer confidence index fell by 8.8 (est. -8.0).

US 2yr treasury yields fell from 1.50% to 1.45%, while the 10yr yield fell from 1.99% to 1.92%. Markets are pricing only a 20% chance of a 50bp rate hike (vs 25bp) in March 2022. Australian 3yr government bond yields (futures) fell from 1.70% to 1.64%, while the 10yr yield fell from 2.27% to 2.19%. The first RBA rate is priced for June 2022.

Commodities, Brent crude oil futures rose 0.7% to $94, copper fell 0.1%, gold rose 0.1%, and iron ore rose 1.9% to $133.

Overnight Currency Range

AUD/USD 0.7165 0.7228

EUR/USD 1.1314 1.1377

GBP/USD 1.3575 1.3640

USD/JPY 114.79 115.30

NZD/USD 0.6688 0.6729

USD/CAD 1.2674 1.2761

USD/CNH 6.3180 6.3350

AUD/JPY 82.39 83.32

AUD/NZD 1.0713 1.0743

AUD Thoughts

A quieter day is expected ahead with the US out for the Presidents Day long weekend This week’s potential local highlights include wages data on Wednesday along with Capex on Thursday.

AUD/USD failed to hold to the north of the 0.7200 level for a third successive session, despite solid jobs data earlier in the week keeping calls for RBA monetary tightening in H2 this year alive. At current levels in the 0.7170s, AUD/USD is trading a touch lower on the day, though still looks on course to gain about 0.7% on the week, which would mark the pair’s third successive week. Resilience in copper and gold prices has been largely negative, as far as the commodity-sensitive Aussie is concerned, by slightly lower oil and iron ore prices on the week.

Geopolitical tensions between Russia, Ukraine and NATO remain elevated as Russia continues to amass troops on Ukraine’s border and violence in Eastern Ukraine between government and separatist forces escalates, underpinning the US dollar on the final trading day of the week. That is likely the main reason why AUD/USD hasn’t been able to hold above the 0.7200 handle on Friday or mount an attempt at testing last week’s high at 0.7250.

AUD’s resilience to the escalating geopolitical situation in Eastern Europe will be put to the test once more next week with a key face-to-face meeting between US Secretary of State Anthony Blinken and Russian Foreign Minister Sergey Lavrov in focus. Any signs the two sides come to some sort of agreement to de-escalate things could help propel the pair back above monthly highs and back towards 2022 highs in the 0.7300 area.

AUD/USD traded in a 0.7165/28 range on Friday with offering interest now steady in the 0.7240/50 region while demand remains ahead of 0.7100

Event Risk Data Today

Japan: The February Nikkei services PMI will likely reflect impact of omicron on services growth. The manufacturing PMI should meanwhile highlight the continued recovery of manufacturing.

Eur/UK: Manufacturing’s robust strength through recent disruptions will be apparent in the February Markit manufacturing PMIs (market f/c: 58.6 for the Eurozone; 57.0 for the UK). The services PMI should continue to indicate growth as services demand recovers from omicron (market f/c: 51.7 for the Eurozone; 55.0). Rightmove’s house prices are anticipated to cool over the course of 2022 as housing demand in the UK slows.

US: Observes Presidents’ Day holiday.

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