AUD/USD
After a period of diversion, the USD has again taken over as the major driver of AUD/USD. Oil price movements are also impacting the direction in AUD/USD because of Australia’s large net energy export status. Australia’s energy exports (coal, LNG, and oil) account for 23% of Australia’s total exports.
AUD, despite the volatility in the trend, continues to remain above its level at the start of the Ukraine war on 24 February. AUD also continues to out-perform the currencies of the other major energy-exporting countries Norway and Canada, despite their central banks raising interest rates in the current economic cycle.
Last week’s Australian labour market report for March was rather unexciting. It is unlikely to change the RBA’s current mindset. The Australian unemployment rate remained unchanged at 4.0%, as did the participation rate at 66.4%. Total employment growth was less than expected, but it nevertheless added to the previous four months of strong employment growth. Encouragingly, full-time employment growth, rather than part-time employment growth, drove the monthly net increase in total employment.
In terms of Australian economic data released this week, the highlight is Friday’s PMI survey. At present, all three components (manufacturing, service, and composite) are above 55.0, and well-above the diffusion index of 50.0, which indicates expansion. While there is no consensus estimate for the April PMI, it would be very unlikely that any of the PMIs’ would fall below 50.0 and into contractionary territory.
AUD/USD is likely to be dominated by offshore factors over the course of this week. Reflecting upon recent offshore central bank activity, last
week, the Central Bank of Korea has joined the Monetary Authority of Singapore in tightening monetary policy. The week before, the Reserve Bank of India tightened monetary policy, as did the Reserve Bank of New Zealand, and the Bank of Canada did the same.
The RBA is likely to be recognising that inflation in the Asian region is becoming more of a concern. The external pressure is building upon the RBA, and they are increasingly likely to follow suite and raise interest rates at some point after the April 27 Q1 CPI inflation release. The Peoples Bank of China and the Bank of Japan are the two Asian central bank outliers, instead continuing to ease, rather than tighten, monetary policy.
AUD/EUR
The ECB held their monthly policy meeting last Thursday, and indicated they would be ending their asset purchase program by Q3 of this year. The market was hopeful that the ECB would signal an earlier end to asset purchases and a subsequent sooner lift in interest rate rises. Consequently, EUR/USD declined to 1.0758, a new low in the cycle, as the details of the ECB’s plans became known to the market. The ECB noted that wage growth had not intensified. The implication being that the second-round effects on inflation were less concerning for them. The ECB nevertheless acknowledged that inflation pressures had intensified and the risk was inflation would further increase. The ECB added that the conflict in the Ukraine had increased
uncertainty and is severely impacting growth in the Eurozone economy. Interest rate pricing for future ECB interest rate rises declined slightly. The interest rate market is now pricing 64 basis points of interest rate rises by the end of the year. In terms of change, this market pricing implies that the ECB’s -0.50% policy deposit rate will be at 0.0% by year-end, with a slight risk that the policy deposit rate is a little higher. Despite the post ECB-meeting depreciation in EUR/USD, the rally in AUD/EUR was short-lived, as AUD/USD came under downward pressure courtesy of the stronger USD, and the slightly softer outlook for the Eurozone and global economy. Following the 13.3% appreciation in AUD/EUR since early February to its recent high of 0.6981, AUD/EUR continue to consolidate. Derived non-commercial positions in AUD/EUR as measured by the CTFC on the Chicago Mercantile Exchange continue to show a large amount of net long AUD/EUR positions. While this data supports the recent rise in AUD/EUR, it also suggests that if AUD/EUR were to begin to decline, the unwinding of these non-commercial positions may accelerate any decline in AUD/EUR. This week in the Eurozone, the final estimate of the March Eurozone CPI is due on Thursday. Confirmation annual Eurozone CPI inflation remained at 7.5% is likely to be forthcoming, with core inflation at 3.0%. The April Eurozone PMIs are due on Friday. At present, despite the headwinds to Eurozone GDP growth, all three PMI’s (manufacturing, services, and composite) remain above an index level of 54.0, more than 4 index points above the key 50.0 level. The risk is a decline in the PMI series, and a fall in EUR/USD given we have seen declines in the Eurozone ZEW survey and IFO surveys.