- AUD/USD is moving in on the key hourly resistance.
- Risk sentiment remains positive and unhinged by yield curve inversions.
- Ukraine & Russian peace talks take precedence and lift market spirits.
At 0.7510, AUD/USD is attempting to move higher as it takes on a wall of resistance near 0.7520. The price has travelled from a low of 0.7456 to a high of 0.7518 so far.
The risk sentiment is making for a better environment for the high beta currency as US stocks climb on Tuesday, lifted by signs of progress in peace talks between Russia and Ukraine. However, the US Treasury yield curve has flashed warning signs for the economy as curves invert, keeping a lid on the risk-on mood.
Moscow has decided to drastically cut military activity around Kyiv and northern Ukraine, while Ukraine proposed adopting a neutral status but with international guarantees that it would be protected from attack. This was something telegraphed by Financial Times Monday which had already led to an improved risk-on environment before Aussie Retail Sales beat expectations and started to lift the currency also.
Retail Sales increased by 1.8% MoM in February, resulting in annual growth of 9.1% YoY. The strong monthly result was driven by social spending, which recovered as Omicron caution dissipated in most states, analysts at ANZ Bank said. ”Strong discretionary spending in February is a good sign of household financial wellbeing ahead of intensifying inflation.”
Meanwhile, the Reserve Bank of Australia’s tightening expectations continues to rise. ”WIRP suggests liftoff is fully priced in for the June 7 meeting now. At the beginning of March, liftoff was priced in for the August 2 meeting,” analysts at Brown Brothers Harriman argued.
”Swaps market sees 225 bp of tightening over the next 12 months and another 125 bp over the following 12 months that would see the policy rate peak near 3.75%, up from 3.5% at the start of the week. ”
The analysts noted that AUD is nearing a test of the October high near 0.7555. ”A break above that would set up a test of the May 2021 high near 0.7890. it is the best performing major YTD, followed by NOK, CAD, and NZD.”
US recession on the cards?
In the US, there are worries that a recession is on the way as the US 5s30s curve has inverted for the first time since 2006 and the 2s10s curve has inverted for the first time since 2019 as the market prices in faster rate hikes.
”Historically, a US recession tends to follow a year after the curve inverts, though the variance is large and there are occasional false positives,” analysts at TD Securities said, adding:
”The 10y-2y curve, which is another common metric, implies a 37% probability of recession within a year and a 43% probability one- to two-years ahead at current levels. The 30y-5y curve has actually moved in the opposite direction of late, with current levels suggesting a 19% recession chance in one- to two- years.”
Ukraine & Russian peace talks
Meanwhile, during the highly anticipated start of fresh peace talks, Russia promised on Tuesday to scale down military operations around Ukraine’s capital and north, while Kyiv proposed Ukraine join the EU while adopting neutral status by not joining NATO.
The peace talks are taking place in an Istanbul palace more than a month into the largest attack on a European nation since World War II.
”Talks successful enough for a possible meeting between Putin and Zelensky, says Ukrainian presidential advisor Mykhailo Podolyak. “We have documents prepared now which allow the presidents to meet on a bilateral basis,” he said.
Nevertheless, Russia’s top negotiator said that there is still a long way to go until a mutually acceptable agreement with Ukraine is reached and de-escalation around Kyiv and Chernihiv does not mean a cease-fire. British Prime Minister Boris Johnson said a ceasefire agreement in Ukraine will not be enough to lift British sanctions against Russia. US president, in the same vein, says that the US will keep sanctions.
Looking ahead for the week, US Nonfarm Payrolls data will take centre stage as a meanwhile distraction t the Ukraine crisis on Friday. ”Employment likely continued to advance in March following two strong reports averaging +580k in Jan and Feb,” analysts at TD Securities said.
”That said, we expect some of that boost to fizzle, though to a still firm job growth pace of +350k. Indeed, job gains should lead to a new drop in the unemployment rate to a post-COVID low of 3.7%. We also expect wage growth to slow to a still firm 0.3% MoM pace.”