Aussie, Kiwi Firm on Increased Risk Sentiment

The Australian and New Zealand Dollars are trading higher on Tuesday as the two currencies tracked global equity markets higher. The price action suggests some investors may not be buying into the headlines calling for the imminent invasion of the Ukraine by Russia. They may be placing their early bets on a diplomatic solution to the problem.

Meanwhile, the Aussie remained supported by strength in the energy and metals markets, as traders also assessed the impact of the Reserve Bank of Australia’s (RBA) minutes of its latest meeting on the direction of the currency.

At 08:30 GMT, the AUD/USD is trading .7148, up 0.0020 or +0.28% and the NZD/USD is at .6644, up 0.0027 or +0.41%. On Monday, the Invesco CurrencyShares Australian Dollar Trust ETF (FXA) settled at $70.63, down $0.05 or -0.07%.

Traders Weighing Chances of War Against Diplomatic Relief

While most headlines and the recent sell-off in risky currencies suggest investors are betting on a Russia attack on Ukraine, today’s price action suggests this assessment may be softening.

Over the week-end, the U.S. State Department said it sees no “tangible sign” of de-escalation of Russian forces on the Ukraine border. However, it also added it remained unclear whether Russia was interested in pursuing a diplomatic path.

So with doubts being raised, perhaps some Aussie and Kiwi traders have decided to lighten up on the short-side. It is also possible that Russia is bluffing in an effort to force Ukraine to cave to its demands.

RBA Minutes Reveal Policymakers are Waiting for Wages to Rise Before Hiking Rates

Australia’s central bank is closer to meeting its economic goals than it has been for years, but is prepared to be patient on policy as wage growth continues to lag even as inflation picks up.

Minutes of the Reserve Bank of Australia’s (RBA) February meeting released on Tuesday showed its Board was yet to be convinced that the acceleration in inflation would be sustained and wanted to see wages respond before moving on interest rates, Reuters reported.

“The Board is prepared to be patient as it monitors how the various factors affecting inflation in Australia evolve,” the minutes showed.

Daily Forecast

Russia-Ukraine remain a wildcard since no one knows whether there will be a war between the two countries or if Russia is bluffing to gain concessions.

A war would likely fuel a short-term sell-off in risky assets like the Aussie and Kiwi. However, a diplomatic agreement would allow Western nations to declare victory, while Russia would celebrate the gaining of concessions. This would likely trigger a surge in the AUD/USD and NZD/USD.

However, more importantly, it would allow investors to continue to wager on a rate hike as early as June despite what the RBA is saying.