Are we ready for some volatility

Risk trends are back in play amid Geo-political concerns

Late February was characterized by caution when it came to playing the trend in FX; especially when it came to a lower Australian dollar.

As the first weekend in March arrived, Putin got approval to deploy Russian troops in to the Ukraine. This brought risk aversion back to the table.  And, after a week of volatility and a lower USD/CNY fix by the Peoples Bank of China, CNY remained at elevated levels; adding to this market caution.

However despite some moderate safe haven plays and some significantly higher option volatility the FX world has so far remained reluctant to move amid these Geo political concerns. Fear has not yet set in; and we have not seen any meaningful corrections or breaks to the downside for the JPY crosses. Arguably traders are becoming immune to such stories and as such, conservative plays were the major theme.

But…with some huge event risk on the calendar the first week of March, this may be set to change.

AUD/USD – what’s at stake?

Despite this backdrop, the Australian Dollar remained somewhat robust, and even remained well bid against JPY after Monday’s initial fall. The pair that has been the focus of speculation with regards to interest rate differential; is still surprisingly holding onto the 8900 mark. So with this key support level still intact despite Russian/Ukraine headlines, movements in the pair will come down to local economic news this week.

US economy

As with any first week of the month, this week is all about Non-farm Payroll numbers.  After US data, which disappointed many, was blamed on bad weather, traders are now waiting on the all-important March number. This should give some indication on whether this data set was just a blip or something more long term when it comes to the US recovery. This should also push us out of the lackluster rut the US Dollar has been in while FX traders contemplated this spoiled data.  Risk themes should also come to the forefront again as we know more. S&P closed at record highs on Friday at 1859.45, but there are some concerns this has been reliant on investor borrowing. According to the NYSE, borrowing for stock purchases is also on record highs.  This therefore leaves us with questions on whether this bull market is as stable as it seems and whether this optimism can really have a follow through. The market for the greenback has been focused on tapering story for some time now. With many traders expecting a steady reduction in QE3 on a month by month basis, these NFP should give us some indication if they are correct.

Non-farm Payroll – Friday 7^th March – Forecast 151k jobs added.

Australian dollar

February did not bring with it a good data set for the Australian economy. CAPEX and employment were the big disappointments. Though treading water, the Australian dollar looks vulnerable to potential catalysts this week as we take a look at some important data.

GDP – Wednesday 5^th March – Forecast 0.7%. Building approvals for this month were good, but it may not be enough to give GDP the boost in needs.

Retail sales- Thursday 6^th March- forecast 0.5%

Trade Balance- Thursday 6^th March –forecast 0.11B Upside risks to exports due to Chinese Lunar New Year buying from China.

RBA Governor Glenn Stevens to give speech – Friday 7^th March. This will be important after the Jawboning we heard at Tuesdays Rate decision. Although they were modest comments from Glenn Stevens he highlighted his worries for the overvalued pair and we may see more of it on Friday.

Longer term (as previously mentioned) bearish AUD is very much in many traders’ minds. Mining investment (which is set to slow significantly), a weaker labour market (unemployment set to hit 6.5%) and china growth concerns will be what we look out for locally, so bear this in mind over the next trading month.

Short-term levels to watch

To the downside we eye the 50 day moving average at 8910. This also happens to be an area where stops continue to build up for those who are looking for short term strength in the pair. Further to the downside we look at the 8825/40 region as the next significant support.  Although some shorts were covered after the good building approvals release, many traders look for the downside in the AUD/USD pair.