24th February 2022 - AUD retreats 40pips to 0.7240s amid the anxiety of Russia’s invasion of Ukraine

Market Headlines

US equity markets continued to fluctuate with headlines regarding Ukraine, but retain a risk averse stance, the S&P500 down 0.8%. Bond yields were mixed, while commodity currencies outperformed.

The US dollar index is up 0.2% on the day. EUR fell from 1.1359 to 1.1306. USD/JPY ranged sideways between 114.96 and 115.20. AUD roundtripped from 0.7234 to 0.7284 (a one-month high) and back. Outperformer NZD rose from 0.6760 to 0.6809 (one-month high) before retracing to 0.6772. AUD/NZD consolidated between 1.0675 and 1.0705 following yesterday’s RBNZ-induced fall.

US 2yr treasury yields opened higher at 1.63% but then fell to 1.57%, while the 10yr yield rose from 1.94% to 2.00%, the latter perhaps driven by the inflationary consequences of higher commodity prices due to Ukraine tensions. 10yr linkers are now implying 2.55% average inflation, compared to 2.47% yesterday. Australian 3yr government bond yields (futures) fell from 1.78% to 1.74%, while the 10yr yield fell from 2.32% to 2.25%. The first RBA rate is priced for June 2022.

Commodities, Brent crude oil futures fell 0.3% to $97, copper fell 1.0%, gold rose 0.4%, and iron ore rose 1.6% to $138.

Overnight Currency Range

AUD/USD 0.7218 0.7284

EUR/USD 1.1303 1.1359

GBP/USD 1.3537 1.3620

USD/JPY 114.92 115.20

NZD/USD 0.6734 0.6808

USD/CAD 1.2682 1.2772

USD/CNH 6.308 6.3288

AUD/JPY 83.00 83.83

AUD/NZD 1.0672 1.0732

AUD Thoughts

Benefitted from the Reserve Bank of New Zealand (RBNZ) 25 bps rate hike and its “hawkish” forward guidance, the AUD/USD climbs to fresh monthly highs, around 0.7280. However, a sudden swing in the market mood due to elevated tensions in Ukraine decreased appetite for risk-sensitive currencies like the AUD. At the time of writing, the AUD/USD is trading at 0.7243.

In the meantime, the US Dollar witnessed fresh flows into it, as the US Dollar Index, a gauge of the greenback’s value against a basket of its peers, edges up 0.10%, sitting at 96.12.

Ukraine – Russia crisis escalates…..According to Sputnik, around 15:39 GMT, explosions were heard at the Donetsk airport. Meanwhile, Interfax reported that Ukrainian government websites are reportedly under cyberattack, including Ukrainian banks. It is worth noting that Ukraine declared a state of emergency on Wednesday of 30 days and urged citizens to flee Russia. At the same time, Russia closed its embassy in Ukraine and evacuated the staff.

That weighed on the AUD/USD pair, as depicted by the 40-pip drop from daily highs, but found support near the February 10 daily high at 0.7245, a crucial support level for AUD bulls in the event of extending the uptrend.

In the Asian session, the Australian economic docket featured the Wage Price Index (WPI) for Q4 of 2021. The headlines aligned with expectations at 0.7% q/q, while the year-over-year figure came at 2.3%, short of the 2.4 estimations. Analysts at ANZ said that “this WPI was not strong enough to make a June rate hike more certain than not.”

AUD/USD cleared significant supply on its way to a high of 0.7284 overnight. Further offering interest is expected ahead of 0.73 while demand has followed spot higher and rests ahead of 0.7150c.

Event Risk Data Today

Aust: A rebound from delta, led by equipment investment, is expected to produce a lift in private new capital expenditure in Q4 (f/c: 3.0%) 2021/22 capex plans should be positive, though covid disruptions still pose downside risk to the upward revision from estimate 4 to 5.

NZ: The trade deficit is anticipated to remain wide in January given the ongoing strength in imports ( f/c: -1250mn).

US: The January Chicago Fed activity index will provide a timely update on activity in the region (market f/c: 0.15). Meanwhile, initial jobless claims are set to remain at a very low level (market f/c: 235k). A very small upward revision is anticipated for the second estimate of Q4 GDP (market f/c: 7.0% annualised). January’s new home sales is expected hold near a strong level given the gradual alleviation of supply constraints (market f/c: 800k). The February Kansas City Fed index should continue to reflect a strong manufacturing outlook for the region (market f/c: 25). The FOMC’s Barkin, Bostic and Mester are all due to speak at different events

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