AUD/USD broke heavily below major support at 0.70 on Friday - but has since bounced back. In the view of economists at ING, some temporary calm in Eastern Europe and the Chinese Lunar New Year holidays could make for some better conditions for risk assets, allowing some FX recovery stories to come through – such as the Australian dollar.

Short squeeze pre-RBA?

“A possibly quieter week in terms of geopolitical risk (and US 10 year Treasury yields perhaps more contained) could provide a breather to risk assets and allow some currencies such as the Australian dollar to recover ahead of big event risks such as tomorrow's RBA meeting.” 

“We think now the risk is greater of a short squeeze in the run-up to the RBA's event risk tomorrow.”

“Credit data released overnight in Australia showed some very healthy 7% YoY credit growth (albeit business rather than consumer-led) and a change in RBA language and a potential end to QE could send AUD/USD back towards the 0.7080/7100 area.”