AUD/USD
AUD/USD has been remarkably strong over recent weeks. And last week’s close at 0.7370, was AUD/USD’s its highest weekly close in four-months. The reasons behind the unusual strength in AUD since the Ukraine-Russian conflict commenced was highlighted in last week’s weekly. But in a nutshell, the strength in AUD reflects a number of reasons:
(1) Australia’s economy is currently very strong. Last week’s economic data showed Australian Q4 real GDP grew a solid 3.4% (QoQ) to be 4.2% (YoY).
(2) The RBA is getting ready to lift interest rates later this year and AUD is lifting in anticipation of this. While the RBA sees the conflict in the Ukraine as an “uncertainty” it does not yet believe it will significantly affect Australia’s economy.
(3) Australia is now running a current account surplus equal to an impressive 3.6% of GDP, after decades of running a large current account deficit (up until early 2019). Last week’s Australian January international trade numbers showed record exports, and the makings of another quarterly current account surplus in Q1.
(4) Australia is a net energy exporter, and so further rises in crude oil prices, and commodity prices generally, are supportive for AUD. More than 80% of Australia’s merchandise (goods) exports are commodities.
(5) Events in Ukraine appear to be impacting currency markets which are directly affected by the turmoil. By extension, EUR is depreciating and AUD is lifting.
This week, it will likely be offshore factors that drive the direction in AUD again. There is a lack of domestic economic data to make an impact. If we get further rises in oil prices as Ukraine-Russian tensions escalate, AUD/USD is likely to further appreciate. This is certainly where the risk resides.
AUD/USD closed last week above the 200-day moving average level of 0.7324. The last time
AUD/USD lifted to test the 200-day moving average was in late October last year. At that time, AUD/USD was unable to lift above the 200-day moving average, and AUD proceeded to decline when the RBA abandoned the 0.10% three-year bond yield target but signalled that it was not looking to raise interest rates anytime soon.
AUD/USD closing the week above the 200-day moving average of 0.7324 is a very bullish sign. Until we get change in the current drivers of AUD/USD, it is likely the 200 moving average will now act as a “technical support” level for AUD/USD.
AUD/EUR
Last week, we stated in the weekly “the previous medium-term weekly downtrend in AUD/EUR has been broken … by the fact that AUD/EUR closed higher last week (the second consecutive weekly higher-close)”.
We also noted that … “AUD/EUR, much to the market’s surprise, has lifted over the course of a week in which the Ukraine invaded Russia … 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”.
We also stated that markets are “largely pricing the ramifications of the (Russia-Ukraine) 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.”
Well last week, as the Ukraine-Russian conflict carried on, AUD/EUR lifted to a four-and-a-half-year high of 0.6754. Despite the rapid appreciation in AUD/EUR, there appears very little in the short-term to slow down the ascent of the AUD/EUR exchange rate. The strength in AUD (see AUD/USD section above) and the weakness in EUR is creating the perfect mix for AUD/EUR appreciation.
The European Central Bank (ECB) meets this week to decide upon monetary policy settings. Despite the ECB’s strict 2.0% inflation target,
and a further lift in Eurozone CPI inflation last week to 5.8% (YoY), the ECB will not lift interest rates while the current war in Ukraine-Russia is impacting the European economy. Unless the ECB say they are ready to “soon” lift interest rates at this week’s policy meeting, EUR/USD is likely to further depreciate, and AUD/EUR further lift.
At the policy meeting, the ECB will update and publish their inflation and GDP growth forecasts. The risk is the ECB’s inflation forecasts are very high, and this generates some temporary strength in EUR (ie. a temporary dip in AUD/EUR) as markets contemplate a long-term outlook for much higher Eurozone interest rates. However, we don’t see this as a very high risk of sustaining strength in EUR.
The ECB’s current economic forecasts are published below. While a lift in the 2022 inflation forecast from 3.2% to around 3.9% is likely, it is unlikely that the ECB will forecast inflation below 2.0% for 2023 (or even for 2024).
The message high inflation forecasts will imply, is that the ECB will be ready to lift interest rates once the conflict in the Ukraine has subsided.
At that point, EUR will begin to appreciate, and AUD/EUR begin to ease back towards its long-run average of 0.6386. We are not at that point just yet. The current risk is EUR further declines, and AUD/EUR further rises.