AUD/USD pulls back in tandem with commodities from mid-0.7400s to mid-0.7300s, geopolitics remains in focus

• AUD/USD has reversed sharply lower from the 0.7440s to the 0.7350s in tandem with price action in the commodity space.
• Russia/Ukraine is the driving force and with de-escalation unlikely and tougher Western sanctions likely, upside risks to commodities remain.
• Longer-term bulls may well be targeting Q4 2021 highs in the 0.7550 area over the coming weeks.

With major commodity prices such as WTI, gold and copper having reversed back sharply from earlier session highs, the commodity-sensitive Aussie’s fortunes have also shifted. AUD/USD, at one point up nearly 1.0% on the day in the 0.7440s, is back to trading in the red in the 0.7360s, where it trades down by slightly more than 0.1%. Geopolitics (the Russo-Ukraine war) and its impact on commodity prices and on the global economy remains the major theme driving macro risk appetite, with the Aussie succumbing to these flows and trading in tandem with the prices of its major raw material exports.

Chatter over the weekend about a potential ban on Russian energy exports from the US and its allies got commodity markets roaring initially higher, underpinning AUD/USD, though Germany and Japan have since pushed back against the idea of a Russia import boycott. That seemed to take the wind out of the commodity rally and thus also the Aussie, as well as the news that the Russian and Ukrainian Foreign Ministers will be meeting in Turkey later this week.

Russian government rhetoric regarding the demands it wants Ukraine to fulfill if there is to be a ceasefire remains maximalist, meaning hopes for meaningful de-escalation remains slim. Moreover, amid fierce Ukrainian resistance and severe logistical deficiencies, Russian forces appear to be struggling to make substantial ground in Ukraine. Hence the recent shift in tactics towards indiscriminate, heavy artillery bombardment, a shift in tactics that could intensify. As Western nations look on in horror, the risk that they impose tougher, more disruptive sanctions remains elevated.

For the Aussie, that suggests upside risks are likely to remain very much intact. Commentary from RBA Governor Philip Lowe and Deputy Governor Guy Debelle this week will be interesting (how does the RBA interpret recent events and how does this impact the policy outlook?), but will play second fiddle to macro/geopolitical themes. The same can be said for US Consumer Price Inflation data (for February) out on Thursday and March Consumer Sentiment data on Friday - interesting and important to watch, but nonetheless unlikely to dictate the price action.

As long as there isn’t a massive collapse in risk appetite that triggers a rush for US dollars (i.e. on fears of a nuclear escalation between NATO and Russia) and as long as the recent trend higher in commodities continues, AUD/USD might be headed towards its Q4 2021 highs in the 0.7550 area in the coming weeks. Dips towards support in the form of the January high in the 0.7300 area may well be an attractive entry point for some medium-term bulls.