Aussie Dollar Drops Amid Lingering War Fears

AUD

The Australian Dollar is down off the back of the Middle Eastern conflict showing no signs of abating, causing a broader risk-off tone across markets. In domestic news, while there was no major data released on Friday, there has been a significant shift in market expectations for the trajectory of RBA policy. Before the conflict began, with the cash rate at 3.85%, futures markets expected a year-end rate of 4.20%. With the cash rate now at 4.10%, futures are pricing in a year-end rate of 4.82%. Asian equites were mixed to finish the week with the Hang Seng + 0.4%, Nikkei -0.4% and the ASX 200 -0.1%. Looking ahead, Tomorrow we have the RBA Monetary Policy Meeting Minutes which may be worth a read given the contested nature of the decision to lift rates. Please note that Australian markets will be closed this Friday and following Monday for the Easter holidays.

USD

AUDUSD has opened lower this morning, trading at 0.6866. Global equity markets experienced a sea of red to close the week, with key US indices now recording five consecutive weeks of losses, as the Nasdaq closes -2.1%, while the S&P 500, and the Dow Jones both closed -1.7%. U.S.10-year yields rose slightly to 4.43%, while Brent Crude rose 6% and closed above $114 a barrel. In geopolitical developments, U.S. officials reported cautious optimism that talks with Iran are making progress. Secretary of State Rubio later commented that the war could conclude in a matter of weeks and confirmed there are no immediate plans for a ground invasion. Looking to the week ahead, Federal Reserve Chair Jerome Powell speaks tomorrow, an event that frequently triggers volatility as traders parse his comments for interest rate clues. On Wednesday, we will see JOLTS Job Openings, a key leading indicator for overall employment, followed by Core Retail Sales overnight.

EUR

AUDEUR has ticked slightly lower to open the week at 0.5968. The ongoing conflict with Iran continues to pose a significant new energy shock for Europe. European equities were sold off heavily, closing lower on the day with the DAX down -1.4% and the CAC falling -0.9%. On the monetary policy front, while the European Central Bank stood pat in March, hawkish members insist a rate hike cannot be ruled out as soon as the next meeting at the end of April, an outcome the swaps market currently prices at a 60% probability. Additionally, ECB President Christine Lagarde explicitly called for European governments to limit energy assistance to temporary and targeted efforts. In terms of upcoming data, German Preliminary CPI is due for release today, currently forecasted at +1.1%, previously +0.2%.

GBP

AUDGBP is trading slightly higher this morning at 0.5177. The British economy is continuing to struggle, having stagnated in January. UK retail sales fell -0.4% in February, though this was better than the estimated -0.7% drop, and part of the decline was offset by an upward revision to January figures from 1.8% to 2.0%. Equities fared slightly better with the FTSE closing just 0.1% lower. Looking to the Bank of England, the next interest rate meeting is at the end of April. The swaps market has discounted a 50% chance of a hike at that meeting and is pricing in an almost 75% probability of at least two more hikes this year. 

NZD

AUDNZD comes in flat over the weekend, opening at 1.1955. The divergence in monetary policy between the two nations has helped lift the Australian Dollar to its best level against the New Zealand Dollar since 2013, reflecting a move of roughly 4.75% so far this year. The Reserve Bank of New Zealand is scheduled to meet next week on April 8, and the market currently views the risk of a rate hike as minimal.