CBA Play Down Long-Term Risks Of Russia-Ukraine Conflict To AUD

CBA do not expect the (Ukraine-Russia) “war to lead to a significant downgrade to the global economic outlook, though there are risks in Europe. Therefore, we do not expect a long-term impact on AUD from the Ukraine war. AUD/USD is heavily undervalued and we still predict it will increase in 2022. “

• “However, if we are wrong and war leads to a material downgrade to the medium-term outlook for global growth, AUD/USD could quickly fall to a $0.6700‑0.6800 range as a first stop. Depending on the size of the downgrade to global growth, AUD/USD could fall further. These specific levels are not our baseline; they are risks to our baseline. If the medium-term outlook changes, we will consider changing our currency forecasts.”
• “The main drivers of AUD are global not local. Therefore, AUD will be heavily influenced by the Ukraine war in the near term. The near term may last for days or weeks, possibly a few months. This note focuses on the near-term outlook for AUD. Our medium-term currency forecasts are unchanged.”
• “We expect financial markets to quickly assess the outlook for a range of important influences on AUD such as the outlook for the global economy, commodity prices, inflation, risk appetite, and interest rates. Where that assessment ends up will decide the path of AUD spot, forwards and volatility.”
• “Despite the volatility in AUD/USD spot, at 11.7%/yr, AUD/USD one-week implied volatility is only modestly above the long term average of 11.0%/yr. This means the options market does not expect big moves in AUD to continue. Implied vol. remains well below levels seen during the GFC or at the beginning of the COVID‑19 pandemic. In our view, this illustrates that market participants are still not convinced the Ukraine war will upend the global economic recovery. But up‑ending the global recovery, particularly in Europe, is clearly a risk. Therefore, there is more opportunity for AUD/EUR implied volatility to pick‑up compared to other AUD crosses.”