AUD/USD
AUD/USD, after declining as much as 3.7% this week to 0.6829, and to a two-year low, AUD/USD began to stage a little bit of a recovery on Friday, and closed the week at 0.6940. Most of the move in AUD/USD over the week reflects pure USD strength. But downward revisions to global growth and declines in commodity prices, are also having their impact on AUD/USD direction. For now, AUD/USD direction will continue to remain hostage to USD strength. The USD is rising because of high U.S. inflation and high U.S. interest rates. The USD is also rising because of some general risk aversion as declining equity markets and downward revisions to global economic growth occur. It is difficult to see AUD/USD pushing significantly higher until we get a changing macroeconomic environment. On Monday, the Peoples Bank of China interest rate decision may have some bearing on AUD because it will give an indication as to what the Chinese authorities are likely to do to stimulate the economy from the large slowing it is undergoing because of Chinese lockdowns. China’s exchange rate has declined more than 7% against the USD since 19 April. Consensus suggests the Chinese central bank will leave the main benchmark one-year Medium-Term Facility interest rate unchanged at 2.85%. But within that consensus, there are some economists calling for various degrees of interest rate cuts, in order to stimulate the Chinese economy. Industrial commodity prices will remain under downward pressure, and further downward revisions will occur to the global economy until China’s lockdowns ease, and economic activity rebounds.
There is a lot of economic data released in Australia this week which could impact the AUD exchange rate. This includes the minutes of the RBA’s May meeting (on Tuesday), where the RBA lifted interest rates 0.25%, taking the cash rate to 0.35%. The minutes will provide some details on what the RBA were contemplating in their decision to begin the tightening cycle. What was clear, was the RBA’s business liaison program confirmed wage pressures were rising and combined with the confirmation that CPI inflation rose more than expected in Q1, the RBA lifted interest rates. One of the key official measures of Australian quarterly wage growth is due Wednesday. The irony is even if wage growth is lower than expected, it won’t stop the RBA from lifting interest rates on June 7 because CPI inflation is so high. Australia’s April labour market report is due Thursday. The risk is an easing in the rate of employment growth, and for the unemployment rate to remain at 4.0%. It is too early for higher interest rates to have taken affect to significantly dampen employment growth. Last week’s NAB April monthly business conditions index showed a 2 point rise in the main conditions index to an index level of 20. However, the details of the NAB business survey show that trading conditions and profits drove the rise in the main index, not employment growth. Data released last week also showed Australian payroll jobs have now fallen for 5 consecutive weeks. This generates some downside risks to total employment growth. Having said that, consensus is for job growth of 30k and a 0.1% decline in the unemployment rate to 3.9%. AUD/USD will be guided by the Australian data, but dominated by USD strength this week.
AUD/EUR
AUD/EUR declined to the 200-day moving average of 0.6553 on two occasions last week. On both on both occasions, AUD/EUR was able to bounce modestly. There remains downward pressure on both AUD/USD and EUR/USD, but more on EUR/USD. AUD/EUR has now consolidated the large lift it undertook between early March and early April. China’s lockdowns are weighing on commodity prices and generating downward revisions to global economic growth, but high energy prices, higher Eurozone inflation, and the war in Ukraine are having a larger dampening impact on EURUSD. Increased attention will remain on the performance of equity markets, and any further declines in equity markets are likely to result in downward pressure to EUR/USD, and to a lesser extent, AUD/EUR. This is an opposite pattern to what declining equity markets have had on AUD/EUR in previous years. Last week, EUR/USD declined to 1.0354, more than a six-year low; its lowest level since January 2017. Concerns over weaker Eurozone GDP growth as the ECB contemplates higher Eurozone interest rates to combat persistently high inflation pressures, as well as a stronger USD, are generating depreciation pressures on EUR/USD. The foreign exchange options market continues to trade with a bias towards EUR/USD puts (options to sell EUR/USD). In the Eurozone, it is an important week for economic data. The European Commission releases their updated economic forecasts on Monday. While important, the market will be waiting more on the ECB’s updated economic forecasts, which are released on June 9. Nevertheless, the European Commission’s forecasts will be of interest. Eurozone Q1 employment growth is released on Tuesday, and the first estimate of Eurozone GDP growth will be released on Wednesday. Also on
Wednesday, the final estimate of Eurozone April CPI inflation is released. Confirmation Eurozone annual inflation will be at 7.4% will be enough to encourage some ECB officials to further state that they think interest rates could rise sooner, rather than later. The next ECB meeting is on June 9, two-days after the RBA’s next meeting. In the U.S., the weekly economic highlight will be Tuesday’s economic data, containing U.S. April retail sales and April industrial production. There are a number of Fed speakers, including James Bullard, who has been quite vocal in his desire to see a faster pace of U.S. interest rate rises.. The ECB is not currently forecasting stagflation, but the updated economic forecasts are likely to reflect a tilt towards that direction. The OIS interest rate market is currently pricing a 24% chance of a 10 bpts rate rise by the ECB at the June 9 meeting, and for the ECB to deliver a series of interest rate rises, lifting their current benchmark deposit interest rate from -0.50% to +0.25% by the ECB’s mid-December meeting. AUD/EUR is likely to continue to remain well-supported for now. Technical support exists at 0.6642.
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