AUD/USD
After a week of consolidating earlier gains, AUD/USD proceeded to appreciate again, and closed last week on its highs at 0.7415. This in itself is a bullish signal, suggesting further gains for AUD/USD.One of the key reasons for further appreciation in AUD/USD is because the USD has begun to decline, despite last week, the U.S. Federal Reserve beginning its cycle of raising interest rates. While this may seem counter-intuitive, historically, it is not unusual for the USD to decline for the first six months after the Fed commences its tightening cycle. This is because of the forward-looking nature of the foreign exchange market. Three points are relevant in this context.
(1) The USD has been lifting since June 2021 in anticipation of Fed rate rises. Over this period, the broad USD trade-weighted index rose 11%, and is now having a dampening impact on the economy (including helping control inflation pressures).
(2) The forward-looking currency market is now anticipating a slowing U.S. economy as the Fed raises rates. Historically, the USD has moved in line with this slower U.S. economic outlook.
(3) As central banks other than the U.S. Federal Reserve begin raising interest rates in response to inflation pressures, their currencies typically rise. They rise against the USD. The USD depreciates by “default” as the other currencies, including AUD/USD, rise.
This week, apart from movements in the USD, movements in commodity prices, developments in the Ukraine-Russia conflict, and the March Australian purchasing managers index (PMI) economic data are likely to influence intra-day movements in AUD/USD. Recent gains in the Australian PMI data have been supportive of AUD/USD strength. It is possible, AUD/USD could further lift to test the highs of 0.7560 over coming weeks.
AUD/EUR
AUD/EUR is likely to remain elevated above its long-term average while the Ukraine-Russia conflict continues. There are three main reasons for this.
(1) The geopolitical conflict resides on the doorstep of Europe. Markets are appropriately pricing the uncertainty and risk associated with this conflict, by applying downward pressure to the EUR exchange rate.
(2) The Eurozone is a net energy importer, and some 30% of Europe’s oil imports come from Russia. High oil prices are dampening the Eurozone economy, and EUR is remaining under downward pressure as a result.
(3) Australia is a net energy exporter. So high oil prices result in a net income gain to Australia’s economy, supporting GDP growth, and apply upward pressure on the AUD exchange rate.
Consequently, AUD/EUR is likely to remain elevated while oil prices remain high, and while the conflict between the Ukraine and Russia continues.
This week, developments in the geopolitical conflict, as well as some local Eurozone (and Australian) economic data will generate some activity in the AUD/EUR exchange rate. The March purchasing manufacturing indices (PMIs) for both Australia and the Eurozone are released this week. Last week’s extremely strong February Australian labour market report, which saw stronger than expected job growth, and the Australian unemployment rate fall to equal its record low unemployment rate of 4.0%, were supportive for AUD/EUR. While the PMI data won’t have as large an impact on AUD/EUR as the Australian labour market data, the incoming economic information will nevertheless be important for the market to assess near-term direction in AUD/EUR. Both the Eurozone and Australian PMI data are released on Thursday. All things considered, AUD/EUR is likely to spend a period of time consolidating between the 0.6500 to 0.6750 level.