AUD/USD
The USD began to re-assert its strength at the beginning of June. Late last week, as the higher-than-expected U.S. May inflation reading rolled in at 8.6% (YoY), the USD further strengthened. AUD/USD closed the week at 0.7051, its lowest level since 25 May. AUD/USD is currently trading between two competing forces. The dominating forces exerting downward pressure on AUD, and some forces offering support for AUD. The forces working to apply downward pressure on AUD include: (1) A strengthening USD, as high U.S. inflation forces the Fed to lift interest rates, increasing the USD’s appeal; (2) A slowing global economy. Last week, the OECD lowered their 2022 global economic growth forecasts. Growth was revised down by a large 1.5% points, from 4.5% to 3.0%, due to the uncertainty of the Ukraine war, high global inflation, and global central banks lifting interest rates. The forces offering some support for AUD are coming from three sources: (1) Australia’s economy being in relatively good shape, with the unemployment rate at 3.9% close to historic lows; (2) The RBA lifting interest rates; and (3) Commodity prices, despite easing recently, still at relatively high levels. Last week, the RBA raised its cash rate by 0.50% to 0.85% for two main reasons. First, because Australia’s inflation “has increased significantly” and “is expected to increase further”. The RBA’s May forecasts have 2022 CPI inflation at 6.0%, up from its current high level of 5.1%. Second, because the RBA needs to implement the “withdrawal of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic.”
The interest rate market currently has a 42bpt rate increase priced in for the RBA’s July 6 meeting. This implies an 84% chance of another 50bpt, or a 105% chance of a 40bpt rate rise, or a 168% chance of a 25bpt increase. The economic highlight this week will be the U.S. Federal Reserve meeting to decide upon interest rates, early Thursday morning Sydney time. Consensus is for a 0.50% increase in interest rates to take the Fed funds rate (upper-bound) to 1.25%. However, after last week’s higher-than-expected U.S. May inflation data, the risk is the Fed lifts interest rates by 0.75%. The currency market reaction to the Fed meeting will be dependent on whether the Fed lifts interest rates 0.50% or 0.75%, and what the FOMC’s accompanying statement says. Another factor influencing the reaction of the USD will be what Fed Chair Jay Powell says about inflation pressures and the outlook for U.S. interest rates in his press conference. The key take-away for the currency market is higher U.S. interest rates are supporting further strength in the USD. So, upside in AUD/USD is likely to remain limited. The May Australian labour market report is due this week. Consensus is for the unemployment rate to remain unchanged at a low 3.9%. Importers may take note that upside in AUD/USD is likely to limited to the 200-day moving average of 0.7255 for now. Exporters should focus on dips in AUD/USD, and be prepared to be patient. Despite the strength in Australia’s domestic economy and the RBA lifting interest rates, the strengthening USD will remain dominate.
AUD/EUR
Last week, the ECB confirmed the end of their asset purchases would be concluded by 1 July.
The ECB also announced they would begin lifting the key benchmark interest rates by 0.25% in July, and again in September. If by September, “the medium-term inflation outlook persists or deteriorates, a larger (interest rate) increment will be appropriate.” Despite the clear communication by the ECB, EUR/USD fell to its lowest level since the 19 of May as the USD strengthened on the outlook for higher U.S. inflation. The ECB also lowered their real GDP forecasts and raised their CPI inflation forecasts to account for the increase in inflationary pressures (see accompanying table). AUD/EUR declined in response to the ECB’s updated forward guidance, and came under further downward pressure after the higher-than-expected U.S. inflation number. AUD/EUR has been trending lower since reaching a recent peak of 0.6982 in early April. However, a further period of short-term consolidation around 0.6700 is likely before the modest downtrend resumes. The dominate forces of slowing global economic growth in response to high global inflation, higher global interest rate settings, and supply-driven disruptions to global output, have dampened the outlook for AUD/EUR. Eurozone economic data out this week includes the Eurozone June ZEW survey (Tuesday), the Eurozone April industrial production and international trade data (Wednesday), and the final estimate of the Eurozone May CPI inflation reading (Friday). The CPI inflation data is expected to confirm that Eurozone CPI inflation remained at a high 7.4%.