AUD/USD
AUD/USD closed on its lows for the week, at 0.7244. The decline in AUD/USD is below the 200-day moving average of 0.7262, which is a bearish signal. It now suggests the 200-day moving average of 0.7262 will act as short-term technical resistance.
The three major reasons for the decline in AUD/USD over the last week are: (1) a strong USD, which lifted to its highest level since mid-2020 on concerns U.S. interest rates would have to lift sharply.
(2) a downgrade of China’s 2022 GDP growth for the second time this year, to 4.4%. This places China’s 2022 GDP estimate below China’s State Council estimate of 5.5%. The main reasons for the downgrade are high energy import prices, the Shanghai lockdowns, and supply chain disruptions.
(3) A large fall in the price of Australia’s largest commodity export, iron ore, which fell particularly sharply on Friday.
With the downward pressure on AUD/USD and the technical resistance level of 0.7262 in mind, AUD/USD will take major direction from this week’s Australian Q1 CPI inflation report. The RBA has stated it views this week’s Q1 inflation outcome as extremely important.
More specifically, the RBA stated that “over coming months, important additional evidence will be available on both inflation and the evolution of labour costs. Consistent with its announced framework, the Board agreed that it would be appropriate to assess this evidence”.
The RBA are expecting a further rise in inflation. In the RBA’s own words, “inflation had picked up and a further increase (is) expected, with measures of underlying inflation in the March
quarter expected to be above 3%”, compared to 2.6% at the end of 2021.
If either the core (trimmed mean) inflation measure (currently 2.6%) or the headline inflation measure (currently 3.5%) are higher than consensus, the RBA will increase interest rates in May or June.
Consensus has placed Australia’s Q1 headline CPI at 1.7% (QoQ) and 4.6% (YoY), and core (trimmed mean) CPI at 1.2% (QoQ) and 3.4% (YoY). It would have to be an unlikely low CPI inflation outcome, that enabled headline and core inflation to fall from their current levels, for the RBA to not increase official interest rates in May or June.
Regardless of the CPI inflation outcome, reflective of its importance, AUD/USD could move more than a full cent on the outcome of the Q1 CPI inflation report.
According to the OIS interest rate market pricing, there is an 80% chance of a 15bp interest rate increase at the May 3 RBA meeting, which would bring the cash rate from its current 0.10% to 0.25%. For the June 7 meeting, the market is pricing an 106% chance of a 25bp increase in interest rates, which would bring the cash rate to 0.50%. An alternative way of reading this is there is a 106% chance the RBA raises rates 40bpt at the June 7 meeting, bringing the cash rate to 0.50%.
This pricing assumes the RBA’s overnight rate (currently 0.06%) will be brought to the cash rate target (currently 0.10%). The risk is this doesn’t occur, and the RBA’s overnight rate remains below the RBA’s cash rate target because of an excess of Exchange Settlement (ES) balances held by banks, flush with cash, at the RBA.
In the U.S., the first estimate of Q1 real GDP growth is due on Thursday. Consensus is for quarterly annualised GDP growth to ease from 6.9% (saar) to 1.0% (saar). The easing in GDP growth is “noise” in the sense that the U.S. economy remains very strong, with inflation high. The interest rate market is currently pricing a 104% chance the FOMC raises interest rates by 0.50% on May 4, to take the Fed funds rate (upper-band) to 1.00%.
AUD/EUR
The IMF revised down 2022 world GDP growth by 0.8% to 3.6% compared to their January forecasts. The downward revisions were mainly the result of the conflict in Ukraine and higher inflation. The revisions added some downward pressure to AUD/EUR during the week. With no major economic data released in the Eurozone this week, AUD/EUR will take its cue from this week’s Australian Q1 CPI inflation report (see AUD/USD section above). There is likely to be some additional volatility in AUD/EUR courtesy of the quarterly Australian CPI inflation outcome, as well as the usual factors influencing USD direction, oil prices, and activity in the Ukraine conflict. AUD/EUR continues to consolidate a tight range, with short-term technical support at 0.6694 and 0.6600. At present, real (inflation-adjusted) Australia-Eurozone two-year bond spreads suggest there is fundamental support for AUD/EUR. We know the Eurozone international trade surplus has been narrowing as high energy import costs increase total import costs. This lowers the valuation of EUR, and also supports AUD/EUR because Australia’s trade surplus has been rising. In fact, the corresponding impact of the trade balance adjustments has meant Australia’s current account surplus (at 3.6%) is now 1.0% of GDP above the Eurozone’s current account surplus (at 2.6%) for the first time.