Australian dollar riskiest DM currency in the world

DXY was down last night as the Ukraine relief rally ebbed and flowed:

AUD enjoyed the lift:

Oil and Gold too:

And base metals:

Big miners (LON:GLEN) edged up:

EM stocks (NYSE:EEM) too:

US junk (NYSE:HYG) lifted. Not so EM:

The curve steepened for a second day:

And stocks flipped, flopped around:

Westpac has the wrap:

Event Wrap

US retail sales in January beat expectations, rising 3.8%m/m (est. +2.0%, prior revised to -2.5%m/m from -1.9%m/m). Industrial production was also stronger than expected, rising 1.2%m/m (est. +0.5%m/m), with capacity utilisation rising to 77.6% (est. 76.8%). The NAHB homebuilder sentiment survey was as expected at 82 (prior 83). The housing market appears to be consolidating at high levels.

The FOMC minutes from the January meeting noted that inflation was high and policy tightening was warranted soon, adding:” Most participants noted that, if inflation does not move down as they expect, it would be appropriate for the Committee to remove policy accommodation at a faster pace than they currently anticipate”. On its holdings of bonds:” The Committee expects that reducing the size of the Federal Reserve’s balance sheet will commence after the process of increasing the target range for the federal funds rate has begun”.

Eurozone industrial production in December was boosted by strong capital goods production. Headline production rose +1.2%m/m and +1.6%y/y (est. +0.3%m/m and -0.5%y/y).

UK CPI inflation in January was -0.1%m/m and +5.5%y/y (est. -0.2%m/m and +5.5%y/y), with core at +4.4%y/y (est. +4.3%y/y).

Event Outlook

Aust: Balancing the ongoing support from the NSW and Victoria reopening against the omicron outbreak over the summer holidays, Westpac anticipates employment to lift by 30k in January (market median estimate is 0k), with risks to the downside. Participation holding steady at 66.1% should facilitate a fall in the unemployment rate of around 0.2ppt (Westpac f/c: 4.0%, market 4.2%).

Japan: The emergence of omicron should see capital investment decline in December’s machinery orders (market f/c: -2.0%).

US: Initial jobless claims are set to remain at a very low level (market f/c: 218k). Robust underlying demand for housing should continue to buoy housing starts at a high level in January (market f/c: -0.4%). Meanwhile, the February Phily Fed index will offer a gauge of business activity in the region (market f/c: 20.0). The FOMC’s Bullard will speak on the economic and policy outlook.

Credit Agricole (PA:CAGR) has a nice risk index that offers and insight into whether it is all over:

FX Risk Index

At 1.33(vs 0.84 last week) our Risk Index has continued to rise. There are two factors driving the rise in our Risk Index: (1) tightening global financial conditions; and (2) US-Russia tensions over Ukraine.

Both of these factors have seen a ramping up and modest retreat in the past week. Several FOMC members have talked down the potential for a 50bp rate hike in March and intra-meeting policy rate hikes. Russia has withdrawn some troops from the Ukrainian border.

Investors remain nervous, however, and higher equity and FX market volatility as well as rising gold prices have been the largest contributors to the rise in our Risk Index.

Going forward, investors will continue to watch the evolution of the US-Russia stand-off over Ukraine where a diplomatic solution would see a retreat in risk. US inflation and the pace of Fed rate hikes will also remain front and centre of investor concerns.

The AUD and EUR remain the G10 currencies the most negatively correlated with our Risk Index, and the CHF and USD arethe most positively correlated.

Good luck figuring out what Vladimir Putin is up to. He seems intent on using his military for propaganda purposes as much as anything else.

But we know what the Fed is going to do so expect more risk not less.

AUD to behave accordingly.