The acute phase of the crisis (probably not the last one) in Eastern Europe has passed and the market focus is once again shifting to the battle of central banks against inflation. Short-term market inflation expectations, which are calculated as the spread between 2Y Treasury yield and 2Y TIPS yield, jumped 9 bps to 3.76%, the highest since 2004:Although interest rate futures markets estimate the odds of a March rate hike by 50 bp at 34% (vs. 20% last week), several Fed reps such as Bullard and Bowman hinted, despite heightened geopolitical tensions, that they might vote for an aggressive move, but ultimately the decision would depend on incoming inflation data. Key reports in this regard are the February report on inflation in the US, which will be released on March 10, as well as the NFP, in particular the wage component, which will be published next Friday.The dollar, however, is in no hurry to follow the shifts of rate expectations: for the last seven days, the dollar index has been fluctuating in a narrowing range near the main bullish trend line:In case of a downside test and a drop below 95.50, sellers may be willing to attack 2022 low at 95.00. At the same time, the risk of a new surge in geopolitical tensions, revival of expectations that the Fed will take an aggressive step, equity weakness skew dollar risks in favor of a new rally. Based on these considerations, assuming that the Ukrainian crisis will soon remind of itself, USD long position from current levels with a stop at 95.50 could be a one scenario of a short-term bet on the greenback.The RBNZ raised interest rate by 25 bp and signaled that tightening cycle should continue and by next year the rate could be 2.5%. The Bank also revised the terminal interest rate up to 3.35% (from 2.6%), which was probably the key bullish takeaway that helped NZD to soar. Australian bond yields also rose, as New Zealand’s CB peer is also likely to take an aggressive stance in the coming meetings.The countries of the Australian continent, whose exports are dominated by commodities, and the share of exports in GDP is 24-27%, are forced to use curb monetary easing measures, since inflation has accelerated sharply in both countries since the 4th quarter – up to 3.5% in Australia and up to 6% in New Zealand. The goal is to suppress price pressures in order to contain negative impact of inflation on consumer confidence. With inflation accelerating, consumer confidence in New Zealand appears to have entered a steady downtrend, threatening consumption growth:Next in target could be a test of 0.68, with a subsequent rally towards 0.685 which should wake up some decent selling pressure, as previous attempt to break above the level in January failed. The upward momentum, based on the RSI value slightly above 60 points, has not yet been exhausted. In the medium term, the main resistance level will be the intersection with the upper border of the trend line (level 0.70). A move higher will certainly be eased by signals or firming expectations that the Fed will take a more cautious approach, as today’s RBNZ decision laid the groundwork for a further divergence in the central bank policy with the Fed.Next in target could be a test of 0.68, with a subsequent rally towards 0.685 which should wake up some decent selling pressure, as previous attempt to break above the level in January failed. The upward momentum, based on the RSI value slightly above 60 points, has not yet been exhausted. In the medium term, the main resistance level will be the intersection with the upper border of the trend line (level 0.70). A move higher will certainly be eased by signals or firming expectations that the Fed will take a more cautious approach, as today’s RBNZ decision laid the groundwork for a further divergence in the central bank policy with the Fed.
Source: Tickmill
