USD The Dollar Index rose above 99 on Monday, underpinned by geopolitical tensions (more sanctions against Russia could come on Wednesday) and higher yields/curve steepening.
Last week's solid jobs data also bolsters the case for tight monetary policy ahead; money markets are assigning an 80%+ probability of a 50bps rate hike in May, and see rates rising to 2.25-2.50% by the end of the year.
The minutes of the March meeting, released Wednesday, will be eyed for clues around its balance sheet plans, which many feel is the next major catalyst in US monetary policy, given that aggressive rate moves have already been priced.
EUR The single currency slipped by almost a percent on Monday, giving up a positive (but fleeting) start to the week. Negative geopolitical developments have worked to the detriment of the EUR, and that was a reason cited by many desks on Monday, as Europe reportedly moves towards slapping more sanctions on Russia over alleged human rights atrocities in Ukraine. Technical factors have also played a role, with EURIUSD tripping beneath the 10- and 21-day moving averages, and subsequently beneath 1.10. Technicals say 1.0945-50 is the next support region.
In addition to geopolitical headline risk, ECB minutes on Thursday are the main event this week, where we will be on the lookout for any specifics on how soon a rate hike could come after the end of QE.
AUD The Aussie is gaining ahead of the RBA rate announcement due over night, where analysts expect the Cash Rate Target to be left unchanged at 0.10%. The focus will be on any rhetoric that guides towards the timing of rate hikes (markets have been raising their view of the rate hike trajectory course, of late), although there is an argument that there is scope for the central bank to retain a dovish tone amid the cloudy geopolitical outlook.
The RBA is almost getting all that it wants to justify a rate hike. But will it remain dovish on Tuesday? There's several reasons to believe so.
First, the recent floods on east coast and higher energy prices have dented consumer confidence and will see a temporary lull in growth in the coming month(s).
Second, while the unemployment rate is back at 4% it is yet to generate the wages growth required to get inflation sustainably back within the central bank’s 2-3% target. The RBA will repeat that sustained and lower levels of unemployment are required to push wages growth higher.
Third, China’s growth is softening with its latest Covid lockdowns.
Lastly, high inflation is partly attributable to higher commodity prices due to the Ukraine crisis and lingering supply chain blockages. Both could quickly dissipate and bring about lower inflation. None of this rhetoric will be new to the market, which will continue to price in over 100bp worth of rate hikes by the RBA in 2022.
Analysts continue to think the RBA will begin raising rates in August. The next big decision for the RBA will be whether or not it will re-invest the proceeds of bond maturities or begin to run down its balance sheet. While this decision on QT will be made at the May meeting, investors will be alert to any hints in Tuesday’s statement. Any such hints would move Aussie rates and the AUD.
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