AUD/USD bears are moving in, but face resistance as bulls buy into commodity price related opportunities

  • AUD/USD sliding in broad risk-off, but there are prospects of higher prices to come in AUD.
  • Ukraine crisis is impacting risk again on Tuesday, sending stocks into a sea of red. 
  • Commodities could be supportive of AUD longer term. 

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.

However, analysts at Rabobank argue that, in their view, ”commodity exports offer the Australia economy good insulation and should provide support to the AUD/USD. ”

”The strength of commodity prices combined with Australia’s much improved current account position suggests that there is good reason to expect AUD/USD to break with its traditional role of ‘higher risk’ G10 currency.  We have retained our year-end forecast of AUD/USD0.74.”

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. 

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