AUSTRALIAN DOLLAR FUNDAMENTAL FORECAST: BEARISH

Despite a week filled with market volatility as geopolitical tensions around Ukraine simmered, the sentiment-linked Australian Dollar was one of the best-performing G10 currencies against the US Dollar. On Wall Street, S&P 500 futures managed to pull off a positive week, ending about 0.6% higher after falling as much as 5.4% earlier.

Will the Australian Dollar continue its pursuit higher? The road ahead remains more uncertain, and traders ought to take recent price action with a grain of salt. Sentiment was on the mend into the end of last week in the aftermath of Russia’s attack on Ukraine. The West responded with initial sanctions, but more could be on the way. By Friday, Moscow has been spared from being kicked out of SWIFT and energy restrictions.

This is as the Kremlin said it was open to talks with Kyiv, though the latter showed no signs of taking Russia’s demands nor ceasing retaliation. Meanwhile, reports crossed the wires that the United States is going to sanction Vladimir Putin and Sergei Lavrov. European Union leaders were also discussing cutting off Russia from SWIFT as UK Prime Minister Boris Johnson urged the world to do so.

Ukraine tensions have been building up very rapidly and that risks continue being the case in the near term. Outside of geopolitical tensions, the Australian Dollar will be closely watching March’s Reserve Bank of Australia rate decision. No hike is expected, but traders have been slowing pricing in a more hawkish RBA. I will be covering the event live starting at 3:15 GMT on March 1st, a link to the stream is at the top.

Ukraine or no Ukraine, the Federal Reserve continues to be a hot topic for traders. US inflation is running at a 40-year high. A likely source of Aussie Dollar strength has been fading Fed rate hike bets as US bond yields fell – see below. Those may come back to haunt traders as the central bank has to deliver. St. Louis Fed President James Bullard said that ‘direct links of Ukraine-Russia to the US economy is minimal’.

On Friday, the US will release the latest non-farm payrolls report. The world’s largest economy is expected to add 400k jobs in February as unemployment ticks down to 3.9% from 4.0% prior. But, traders may be eyeing average hourly earnings more closely to see how inflation is evolving in the country. All said, the Aussie Dollar has numerous obstacles facing it to extend recent gains.

AUSTRALIAN DOLLAR VERSUS S&P 500 FUTURES AND 10-YEAR TREASURY YIELD

Chart Created Using TradingView