Aussie Weakens as Risk Appetite Slides

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The Australian dollar slide continues. AUD/USD is down 0.53% at the start of the week and has fallen below the 0.71 level.

Ukraine crisis at fever pitch

War in Europe? The crisis on the Ukraine/Russia border shows no signs of easing, as hopes for a diplomatic solution have not borne fruit. German President Olaf Scholz is in Kyiv and will travel to Moscow for a last-ditch effort to reach some agreement that would prevent a Russian invasion. The US has said Russia might invade as early as Wednesday and the situation remains extremely volatile.

Global equity markets have taken a beating on invasion jitters and oil prices are fast approaching the USD 100 level. On the forex front, the safe-haven US dollar continues to post broad gains as investors are shunning high beta currencies and snapping up safer assets. This is putting strong pressure on the Australian dollar, which is a risk-sensitive currency.

The Aussie is also under pressure as the dovish RBA continues to diverge from market expectations, which is leading to an increase in short positions. The markets have priced in a rate hike before the end of the year, while RBA Governor Lowe has said that the central bank has no plans to raise rates prior to 2023.

In the US, the hot inflation report last week has the markets focused on the number of rate hikes the Fed will deliver this week. The range is from 3-7 hikes, which means there is plenty of uncertainty, and it’s likely that even the Fed hasn’t finalized a course of action. A rate hike next month is a virtual certainty, but the size of the increase is still up in the air, with the likelihood of a 0.50% jumping since the inflation release, which showed that inflation accelerated to 7.5% in January, up from 7.0% beforehand.

AUD/USD Technical

• AUD/USD continues to rally and is testing resistance at 0.7168. Above, there is resistance at 0.7258
• There is support at 0.6987 and 0.6896