AUD/USD
The USD lifted to a fresh 20-year cyclical high against a basket of currencies on Wednesday last week. The lift in the USD came in response to comments made by Fed Chair Jerome Powell, at the Jackson Hole Economic Symposium. Powell said the Fed is “moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2%” and that “restoring price stability will likely require maintaining a restrictive policy stance for some time”.
Cleveland Fed President and FOMC voting member Loretta Mester, added supportive comments to Jerome Powell’s speech. Mester said “my current view is that it will be necessary to move the Fed funds rate up to somewhat above 4% by early next year and hold it there” and added “I do not anticipate the Fed cutting the Fed funds rate target next year.”
Supporting the USD’s appreciation, U.S. two-year bond yields lifted above 3.50% for the first time since late 2007. The USD lifted to a fresh 44-year high against the JPY.
AUD/USD came under downward pressure on the strength in the USD, temporarily declining to a six-week low of 0.6771. Adding additional modest downward pressure to AUD was some softness in the local Australian economic data, including a large second consecutive monthly decline in Australian home lending data during the month of July, and further news by CoreLogic that Australian house prices fell further in August.
This coming week, AUD/USD is likely to take some direction from the RBA’s September board meeting. The current interest rate market is pricing 46bpts of rate rises, implying an 92% chance of a 50bp rate rise. The
communication from the RBA will be of importance. It’s hard to see the RBA being anything but hawkish, and concerned about the high inflation outlook. This may generate some mild support for AUD/USD as the RBA indicates they are going to continue to raise interest rates.
However, overall, USD direction, and not the RBA’s rate decision will remain the main driver of AUD/USD. With little major economic data out in the U.S. this coming week, we may get some consolidation of the recent USD moves in currency markets.
AUD/EUR
AUD/EUR will take some direction from the two central bank meetings scheduled this week. The RBA and the ECB both meet to decide upon interest rate settings.
For the RBA’s Tuesday 6th September meeting, the OIS market is currently pricing 46bpts of interest rates rises, implying a 92% chance of a 50bp rate rise. The RBA’s August meeting guidance was that “the Board expects to take further steps in the process of normalising monetary conditions over the months ahead, but is not on a pre-set path.”
“The size and timing of future interest rate increases will be guided by the incoming data
and the Board’s assessment of the outlook for inflation and the labour market. The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.”
Despite some not-unexpected slowing in the Australian housing market, the inflation outlook in Australia remains concerning. The RBA is likely to press on with a 50bpt rate rise, taking the RBA’s cash rate to 2.35%.
There is a risk the RBA opts for a smaller 40bp rate rise to bring the cash rate to a nice round number of 2.25%. However, with Australian inflation swaps having picked up since the RBA’s August meeting, it is probably too early for the RBA to opt for the reduced 40bpt rate rise.
For the ECB meeting on Thursday September 8, some 58bpts of rate rises are priced into the overnight index swap curve. This implies a 116% change of a 50bpts rate rise or a 32% chance of a 75bpts rate rise. Some of the ECB’s governing council members have been suggesting that a 75bpts rate rise is needed to help get the Eurozone’s annual 9.1% CPI inflation rate under control. The ECB’s sole mandate is price stability, with a 2.0% inflation target.
However, even if the ECB surprise the market with a larger-than-expected rate rise, EUR/USD will only find some temporary strength as the interest rate gap to the U.S. narrows. A large interest rate rise is not enough to alter the headwinds and depreciation pressure on EUR/USD. A large interest rate rise will not solve the current energy crisis facing European businesses and households. What it may do however, is generate a modest dip in AUD/EUR.
Overall, AUD/EUR is likely to remain elevated in the 0.6737 to 0.6937 range this week, well-above its one-year average of 0.6541.