2nd March 2022 - Bears move in but face resistance, bulls buy commodity price related opportunities


Market Headlines

The war in Ukraine continued to weigh on US and European equities, the S&P500 currently down 1.8%. Bond yields fell sharply, and the defensive US dollar rose, and commodities – especially oil - posted large gains. he US dollar index is up 0.8% on the day. EUR fell from 1.1233 to 1.1090 – the lowest since May 2020. The safe-haven yen outperformed, USD/JPY down from 115.20 to 114.72. AUD initially rose from 0.7260 to 0.7290 – a two-month high – before retreating to 0.7242. NZD similarly round-tripped from 0.6750 to 0.6791 and back. AUD/NZD ranged sideways between 1.0719 and 1.0751.


US 2yr treasury yields fell from 1.45% to 1.27%, the 10yr yield from 1.85% to 1.68% - the lowest since early January. Markets price a 25bp hike in March. Australian 3yr government bond yields (futures) fell from 1.58% to 1.45%, while the 10yr yield fell from 2.20% to 2.03%. The first RBA rate is fully priced for July 2022.


Commodities, Brent crude oil futures rose 7.8% to $106 – the highest since 2014, copper rose 3.0%, gold rose 1.6%, and iron ore rose 4.1% to $144. The bi-monthly GDT dairy auction resulted in an overall price rise of 5.1%, with whole milk powder up 5.7% - stronger than expected


Overnight Currency Range

AUD/USD 0.7238 0.7289

EUR/USD 1.1090 1.1233

GBP/USD 1.3303 1.3437

USD/JPY 114.70 115.29

NZD/USD 0.6741 0.6791

USD/CAD 1.2653 1.2750

USD/CNH 6.3070 6.3200

AUD/JPY 83.07 83.85

AUD/NZD 1.0727 1.0746


AUD Thoughts

AUD/USD is suffering a risk-off day on Tuesday as the Ukraine crisis reverberates throughout commodity and financial markets. The unknown is a major risk which is seeing a flight to safety with both US and EU bond yields dropping like a stone and global equities in a sea of red.


It's been another rough session for European stocks which have just closed down about 2.4% as the consequences of Russia's invasion of Ukraine which is spiralling into huge concerns for global markets. In equities, the canary in the mine was with the fall in European banks on Tuesday that came as traders dramatically scaled down their expectations of monetary tightening from the European Central Bank. The yield of Germany's Bund went back to negative territory with a dramatic drop of 25 basis points and that is sending a message that there will be negative ramifications for nations in closer proximity to the war.


This potentially leaves the Aussie in good stead which is proving resilient as high commodity prices and strength in the domestic economy provides a buffer against geopolitical tensions. Australia as a net energy exporter is set to gain from higher commodity prices, with liquefied natural gas and coal up sharply, while wheat, nickel, aluminium and iron ore are all firm.


The Reserve Bank of Australia (RBA) kept interest rates steady at 0.1% after a monthly policy meeting. However, RBA Governor Philip Lowe cited the war in Ukraine as a new source of global uncertainty and said the bank would be patient before raising interest rates. The markets have pushed out a first hike to July from June and removed one rate rise from this year to imply four increases to 1.0% by Christmas.


EUR/AUD shorts are mounting up….Meanwhile, vs the euro, AUD could do far better considering the contagion risks of the war to the eurozone. Bloomberg is reporting that some Chinese state-owned banks have advised power plants and steelmakers to look for alternatives to Russian coal and this could reduce increased revenues streams for Australia and increase its trade surplus, supportive to AUD. Meanwhile, traders have dramatically scaled down their expectations of monetary tightening from the European Central Bank. The yield of Germany's Bund has fallen into negative territory with a dramatic drop of 25 basis points. A canary in the mine is in the fall in European banks on Tuesday.


AUD/USD continued to trade firmly despite the ongoing global risks and peaked at 0.72895 overnight. Offering interest remains thick ahead of 0.7300 while demand is expected to materialise should we dip back to 0.7150.


Event Risk Data Today

Aust: Q4 GDP will be released. A rebound in activity is anticipated with the easing of restrictions seeing improvement in economic conditions. Support from consumer spending and public demand is expected to be offset slightly by weakness in home building; uncertainty around consumption in services is present. Market forecast of 3.3% is broadly in line with the market median.


NZ: Growth in building permits is expected to remain flat in January with monthly issuance holding at firm levels. The surge in import prices outpacing that of export prices should see the terms of trade fall in Q4 ( f/c: -3.0%).


Eur/UK: Rising energy prices should remain a key driver of European consumer inflation in February (market f/c: 5.6%yr). The UK’s Nationwide house price growth should cool over the course of 2022 as rates continue to rise (February market f/c: 0.6%).


US: ADP employment change is set to rebound from the omicron decline in January (market f/c: 375k). The Federal Reserves’ Beige book will provide an update on current economic conditions across the Fed districts. FOMC Chair Powell will testify before the House Financial Services Committee. Evans and Bostic will discuss the economic and monetary policy outlook at separate events.


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