AUD/USD
In an unusual turn of events, AUD/USD and AUD/EUR both managed to close the week higher, despite Russia invading Ukraine. AUD also managed to close the week higher against the traditional “safe haven” currencies of JPY and CHF. The dip in AUD following the act of war only lasted a little over 24 hours. This is very unlike previous patterns of behaviour in AUD/USD following geopolitical events. In the past AUD has declined for weeks. Exchange rate volatility is unusually low.
There are three possible reasons for the relatively low exchange rate volatility, and why AUD/USD didn’t fall significantly last week. First, because market participants see the Russia-Ukraine issue as a factor that will primarily impact Europe, energy costs, and investor sentiment, rather than make a large dampening impact on global economic activity (inflation-impacts aside). Secondly, because global commodity prices are high, and Australia is a major commodity exporter. Thirdly, because Australia now runs a large current account surplus, a big change after decades of running a current account deficit. Countries that run current account surpluses typically have less volatility in their exchange rates than currencies that have current account deficits. The key take-away is AUD certainly has some resilience and strong support.
This week in Australia, apart from on-going Russian-Ukraine developments, there are two significant local events that will impact AUD/USD. The RBA’s monthly board meeting, and the release of Australian Q4 real GDP data. Australia’s Q4 real GDP growth data is released (on Wednesday) and AUD is likely to be modestly influenced by the outcome. Australia’s real GDP growth is expected to rebound by 2.9% (QoQ) after last quarter’s 1.9% (QoQ) decline, which should see annual GDP growth ease from 3.9% to 3.5%. Tuesday’s RBA meeting is likely to be rather uneventful for AUD/USD. There has not been enough new economic data released since we last heard in detail more about the RBA’s “patient” view. And the economic data that has come in, has not been significant enough to turn the dial for the RBA’s board. The Q4 wages data showed annual wage growth edged only 0.1% higher to 2.3%, and the January unemployment rate remained steady at 4.2%.
The events we saw last week in the Ukraine only provide the RBA reason to delay, rather than speed up, the monetary policy tightening process. However, these tragic events are not enough to really change the RBA’s current mindset on the Australian inflation outlook. The view of an unchanged inflation outlook is likely to come through in the RBA’s policy statement on Tuesday.
As per last week’s guidance, importers may want to take note that there appears upside resistance to AUD moving higher at the 100-day moving average level of 0.7240 (and above that, at the 200-day moving average of 0.7335). Exporters may like to take note that there is “technical support” for AUD/USD at 0.7050, and current trading activity suggests exporters are best to buy AUD/USD on dips.
AUD/EUR
AUD/EUR, much to the market’s surprise, has lifted over the course of a week in which the Ukraine invaded Russia. As stated above in the AUD/USD section, this is not typical of the usual behaviour we see AUD/EUR endure when there is a large geopolitical event that causes large risk aversion across equity and bond markets. In almost every previous case of large-scale global risk aversion, AUD/EUR has fallen significantly, and closed lower over the week.
Last week, market participants appeared to be very specific in their market pricing of the Russia-Ukraine event. Largely pricing the ramifications of the geopolitical event in the markets that are directly affected by the event, rather than pricing what the event may mean for global economic and investment activity. That resulted in a lower EUR exchange rate against a basket of currencies.
While AUD/EUR did initially fall, as predicted, when news first appeared of Russia’s invasion of the Ukraine, the modest 0.6% decline in AUD/EUR was brief, and fully reversed itself within 24 hours. While the Ukraine-Russia situations remains fluid, bouts of modest volatility will persist in EUR/USD and AUD/EUR. The previous medium-term weekly downtrend in AUD/EUR has been broken by the fact that AUD/EUR closed higher last week (the 2nd consecutive weekly higher-close). Importers might like to take advantage of AUD/EUR trading between 0.6400 and possibly 0.6450. Exporters are encouraged to buy dips in AUD/EUR.
Looking ahead to this week, while the Eurozone will have some energy-supply challenges which will need addressing, this week’s Eurozone inflation numbers (released Wednesday) will have some impact on AUD/EUR. Consensus is for the first estimate of Eurozone February inflation to rise from 5.1% (YoY) to 5.3% (YoY). Inflation concerns remain prevalent in the Eurozone (less so in Australia). A higher-than-expected Eurozone inflation outcome may see AUD/EUR temporarily dip. But gauging from last week’s trading patterns, it is quite likely we will see AUD/EUR remain somewhat elevated, spending most of its time above 0.6359.