We are cautious about adopting an overly pessimistic view of the USD. Last week’s 1.2% depreciation brought the DXY Index to a significant support level of around 106.70. The greenback’s sell-off was driven by US President Donald Trump’s surprise phone call to Russian President Vladimir Putin, sparking hopes of an end to the war in Ukraine.
American and Russian officials are scheduled to kick off talks this week in Saudi Arabia without the EU or NATO. US Secretary of State Marco Rubio said the next few days will determine how serious Moscow is about peace in Ukraine as both sides try to set up a Trump-Putin summit before Ramadan month starts on March 1. Meanwhile, the EU has responded with an emergency summit of its leaders – including the UK, Brussels, and NATO – in Paris early this week.
There are many irreconcilable red lines regarding Trump’s plan to secure a quick settlement. The partition model – where Ukraine agrees to let Russia keep occupied areas – will likely be resisted by Ukraine and its EU allies. For example, the model sets a dangerous precedent that weakens Ukraine’s sovereignty and NATO’s credibility without assurances of ending future Russian aggression. The sanctions opposed by Russia were also not discussed during the Trump-Putin phone. Hence, it is still too early to predict how Trump’s peace plan will proceed and where it would lead.
EUR faces another political uncertainty this week – the German federal elections on February 23. The opposition CDU/CSU is leading but will find it difficult to form a sustainable and effective coalition due to the fragmented political landscape. If the far-right AfD, trailing in second place, gains more seats in the Bundestag, it would have a stronger ability to disrupt legislation and weaken the post-election coalition-building efforts. The AfD is a Euroskeptic and a fiscal hawk (somewhat) that criticizes military aid to Ukraine with a pro-Russia tilt. Hence, Germany’s election could erode investor confidence that fuelled the EU equity rally and the EUR’s recent gains driven by the ECB’s more aggressive rate cuts and the fatigue in the Trump Trade. Trump’s steel/aluminium and reciprocal tariffs should also cap EUR/USD at its 1.05 psychological resistance level.
AUD/USD may depreciate again after two weeks of appreciation, a pattern established in October. Last week’s 1.2% appreciation brought AUD to a significant resistance level of around 0.6350. We expect the Reserve Bank of Australia to lower the cash rate target by 25 bps to 4.10% at its February 18 meeting. Australia’s CPI and core inflation have returned to the official 2-3% target range. Real GDP growth fell to 0.8% yoy in 3Q24, its worst growth since 4Q20. The RBA considered US tariffs a greater threat to the economy than inflation.
On February 19, the wage price index is expected to slow to 3.2% yoy in 4Q24 after declining below 4% to 3.5% in 3Q24. On February 20, the unemployment rate will likely rise a second month to 4.1% in January from 4% in the previous month. Unsurprisingly, Prime Minister Anthony Albanese’s approval ratings have fallen to their lowest levels since 2022 ahead of national elections that must be held by May 27. While the polls favour a victory by the opposition Liberal-National coalition, a minority government cannot be ruled out.
Quote of the Day
“To the wise, life is a problem; to the fool, a solution.”
Marcus Aurelius
February 17 in history
The British parliament voted to join the European Common Market in 1972.
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