AUSTRALIAN DOLLAR, AUD/USD ANALYSIS, UKRAINE WAR, NATO, COVID-19 - TALKING POINTS
- AUD/USD price oscillations likely to rise on macro-fundamental risks in Asia, Europe
- Australian election, jobs report may inflame Aussie volatility after weak Chinese data
- NATO courtship with Sweden, Finland could raise concerns about a Russian response
AUD /USD volatility may rise in the week ahead, with the Australian election and key employment data due. These will be critical to monitor, especially after the publication of weak data out of China – Australia's largest trading partner – earlier this week. Concern about the impact of local COVID-19 measures on economic activity could send a chilling effect beyond Australia, potentially cooling appetite for risky assets.
Escalating tension over the Ukraine war and the likely admission of Sweden and Finland into the North Atlantic Treaty Organization (NATO) could amplify bearish shockwaves. Demand for liquidity could push the US Dollar higher while simultaneously putting pressure on the Australian Dollar and reinforcing the pair's spectacular decline.
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UKRAINE WAR UPDATE
In light of the war in Ukraine, Sweden and Finland have both confirmed that they will apply for NATO membership. Russia has balked at such a prospect and warned that it would deploy nuclear weapons in the Baltic Sea if either country joined. However, all 30 members need to approve in order for any new entrants to join the military alliance – and one participant is holding out.
Turkey's President Recep Tayyip Erdoğan accused the two Nordic states of harboring Kurdish militants with unsavory goals towards his country. Internal deliberations could thus stall negotiations, potentially stalling the markets' reckoning with political risk posed by Sweden and Finland's NATO admission.
For more updates on geopolitical risks, follow me on Twitter @ZabelinDimitri .
If Russia follows through with its threats – and recent sovereignty-violating adventurism suggests they will – then US Dollar demand may rise amid a bout of risk aversion. Having said that, Mr. Putin has softened his language in this area, potentially obscuring the true level of threat in play. One caveat though was a warning against increased militarization, which may yet provoke a response from the“Russian bear”.
Australians will vote for a new governmenton Saturday, potentially putting Scott Morrison's conservative government out to pasture after it enjoyed a nine-year reign. The center-left Labor party led by Anthony Albanese is slightly ahead in the polls after Mr. Morrison launched his campaign just under a week before voters go to the ballot box.
While the polls do indicate a sense of preference in the electorate, traders may remain cautious. A process known as“herding” – where pollsters shade results to match those of others to reduce potential credibility damage in a scenario where just one survey is seen as“wrong” – could skew the perceived probability of a Labor victory. The latest figures have the Australian Liberal Party at 32.7%, and the Australian Labor Party (ALP) at 35.7%, as of May 17.
Cost of living considerations amid soaring inflation and national defense – especially in light of a more aggressive China – are the top issues for the public. Price growthis at a multi-decade high. Housing affordability may be a particularly big issue. Interest rates are on the rise and the two leading parties have offered competing remedies. The candidates' fiscal proposals may prove critical for the Australian Dollaragainst this backdrop.
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AUSTRALIAN JOBS DATA
Australian jobs data is likely to be an important indicator crossing the wires this week, with economists expecting 30k jobs to be added for the month of April. The participation rate is anticipated to remain unchanged at 66.4%, while the unemployment rate is predicted to come in at 3.9%. That would be slightly lower than the prior month's 4% figure. How might this impact RBA monetary policy after the May meeting ?
The central bank's latest 25-basis-point rate hike and the gloomy presentiment of“starting the process of normalizing monetary conditions” is part of a broader trend of global tightening amid record inflation. With wage growth fanning the flames, the jobs report may be crucial for the Aussie's price trend. If they reflect a tightening labor market, that may give the RBA impetus to hike rates more aggressively.
Having said that, there is a caveat. If Chinese data continues to weaken on the back of anti-Covid lockdown measures, it could send a chill down the Australian economy's spine. Consequently, the RBA may soften its rhetoric and put the Aussie on the defensiveeven as it still intends on raising rates.
READ MORE: How to Trade the Impact of Politics on Global Financial Markets
AUD/USD TECHNICAL ANALYSIS
The Australian Dollar has fallen over 10 percent against the Greenback since April 5, and recently touched a two and a half year low at 0.6829. The pair may be in the early stages of a recovery, though a resistance band between 0.7097 and 0.7119 could keep AUD/USD's ascent in check. How it confronts this multi-layered obstacle may be telling of what is to come, and how traders will position themselves.
AUD/USD - DAILY CHART
AUD/USD chart created using TradingView
A feeble retreat may reinforce a bearish outlook and keep AUD/USD suppressed until sentiment reverses. Conversely, breaking resistance could give a glimmer of hope to bulls who are hoping to break out of the pen. If the pair manages to surmount the ceiling, the next obstacle to clear could be former formidable resistance at 0.7253, where the pair previously stalled before aggressively capitulating.
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