Risk aversion dominates the FX space

It was a disappointing start to the week for the major FX pairs, with some big gaps lower after the Ukraine/Russia situation escalated over the weekend. 

Russian forces entered the Crimean region and this has resulted in a risk-off start to the week. China’s manufacturing PMI from Saturday was meant to be the main headline heading into this week’s trade, but this has now been put on the backburner by Russia. China’s PMI fell to 50.2 in February, an eight-month low, but this was relatively in-line with expectations. Focus now switches to the final February HSBC print, which is due out at 12.45 AEDT and is expected to be revised slightly higher to 48.5. We also have China’s official non-manufacturing PMI reading due out at midday AEDT.

Big week ahead for the AUD

AUD/USD dropped to 0.89 at the open after having closed at 0.893 on Saturday. This is the absolute bottom-end of the range and the pair is under real threat of dropping below this level, with significant event risk on the way. Already commodity currencies are on the back foot following the escalation of the Russia/Ukraine situation. Locally we have ANZ job ads, company quarterly operating profits, commodity prices and new home sales data. The rest of the week will be very busy for the local currency, with plenty of local and regional events to look out for. Tomorrow will be the RBA decision where no change is expected, and the central bank is likely to maintain its neutral bias. We will also have building approvals and current account data due out. This data will be a good lead into the GDP release on Wednesday.

On Thursday we have retail sales and trade balance numbers then on Friday RBA Gov Glen Stevens speaks and will have another crack at clarifying the bank’s current policy assessment. Last week’s disappointing capex numbers will deserve some commentary from the RBA. China’s National People’s Congress begins Wednesday and this will also draw significant attention from the region. Possible widening of the yuan trading band, deepening reforms and economic targets will be the key focus. Should AUD/USD break 0.89 then we could be headed back to January lows.

Yen strength on safe haven demand

The safe-haven trade is back on with traders flocking to the yen and gold. USD/JPY has dropped to 101.45 and remains under pressure. We are currently calling the Nikkei down 0.9% at 14,715 and this could accelerate as the situation continues to unravel. While attention will be on Russia/Ukraine, there will be quite a bit of activity on the USD front this week. Russian tension has potential to steal the limelight away from a critical week for US economic data. ADP non-farm payrolls on Wednesday and the official non-farm payrolls number on Friday will be very important. Analysts are expecting a pullback in the ADP reading and a big improvement in the official reading.

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