Choppy hourly sideways consolidation in mixed sentiment as bulls test key hourly resistance
- AUD/USD is heading towards key hourly resistance.
- Risk sentiment remains positive and destabilized by yield curve inversions.
- Peace talks between Ukraine and Russia take priority and boost market morale.
At 0.7510, AUD/USD is trying to move higher as it comes up against a wall of resistance near 0.7520. The price has moved from a low of 0.7456 to a high of 0.7518 so far.
Risk sentiment creates a better environment for the high-beta currency as US stocks climb on Tuesday, boosted by signs of progress in peace talks between Russia and Ukraine. However, the US Treasury yield curve showed warning signs for the economy as the curves invert, limiting the mood for risk.
Moscow decided to drastically reduce military activity around kyiv and northern Ukraine, while Ukraine offered to adopt a neutral status but with international guarantees that it would be protected against attacks. It was something telegraphed by the Financial Times on Monday that had already led to an improvement in the risk environment before Australian retail sales beat expectations and also started pushing the currency higher.
Retail sales rose 1.8% month-on-month in February, leading to annual growth of 9.1% year-on-year. The strong monthly result was driven by social spending, which picked up as Omicron’s caution waned in most states, analysts at ANZ Bank said. “Strong discretionary spending in February is a good sign of household financial well-being before inflation picks up.”
Meanwhile, the Reserve Bank of Australia’s tightening expectations continue to rise. ”WIRP suggests that take-off is now fully accounted for for the June 7th meeting. Early March liftoff was scheduled for the August 2 meeting,” Brown Brothers Harriman analysts explained.
“The swap market is forecasting a tightening of 225 basis points over the next 12 months and another 125 basis points over the following 12 months, which would see the key rate peak at nearly 3.75%, against 3.5% at the start of the week. ”
Analysts noted that the AUD is approaching 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 so far this year, followed by NOK, CAD and NZD.
US recession on the cards?
In the US, there are fears that a recession is looming as the US 5s30 curve inverted for the first time since 2006 and the 2s10 curve inverted for the first time since 2019 as market prices rise faster.
“Historically, a US recession tends to follow a year after the curve inverts, although the variance is large and there are occasional false positives,” TD Securities analysts said, adding :
”The 10y-2y curve, which is another common measure, implies a 37% chance of a recession one year from now and a 43% chance one to two years ahead at current levels. The 30yr-5yr curve has actually moved in the opposite direction lately, with current levels suggesting a 19% probability of a recession in one to two years.
Peace talks between Ukraine and Russia
Meanwhile, in the much-anticipated start of new peace talks, Russia on Tuesday vowed to scale back military operations around the Ukrainian capital and the north, while kyiv offered Ukraine to join the EU while adopting a neutral status by not joining NATO.
The peace talks are taking place in an Istanbul palace more than a month after the biggest attack on a European nation since World War II.
“Sufficiently fruitful talks for a possible meeting between Putin and Zelensky, believes Ukrainian presidential adviser Mykhailo Podolyak. “We have prepared documents now that allow the presidents to meet on a bilateral basis,” he said.
Nevertheless, Russia’s chief negotiator says there is still a long way to go before a mutually acceptable deal with Ukraine is reached and that de-escalation around Kyiv and Chernihiv does not mean a ceasefire -fire. British Prime Minister Boris Johnson has said a ceasefire agreement in Ukraine will not be enough to lift British sanctions against Russia. The American president, in the same vein, says that the United States will maintain the sanctions.
Looking ahead to the week, US nonfarm payrolls data will take center stage as a distraction from the Ukraine crisis this Friday. “Employment likely continued to advance in March after two strong reports averaging +580k in January and February,” analysts at TD Securities said.
”That said, we expect some of this momentum to crumble, but at a still-firm job growth pace of +350,000. Indeed, job gains are expected to drive further unemployment rate drops to a post-COVID low of 3.7%. We also expect wage growth to slow to a still firm pace of 0.3% MoM. ”