AUD/USD
AUD/USD avoided edging lower of the course of last week. But showed an unconvincing bounce, closing marginally above the previous week’s close. What is interesting, is it has also been a week when the USD has closed the week lower. AUD has undergone some outright depreciation, reflected by the fact that AUD has moved lower on a trade-weighted index basis over the last week. AUD/USD is depreciating because of growing concerns over slowing economic growth. High inflation and rising interest rates are generating a slowdown in global economic activity. Because more than 60% of Australia’s exports are commodities, and exports make up some 23% of Australia’s GDP, then when commodity prices fall because of concerns over global economic growth, AUD tends to depreciate. Reflecting the global economic slowdown, oil prices are down almost 15% from their recent June highs, and almost 20% from their immediate post-Ukraine invasion early-March highs. Base metal prices, as measured by the broad London metals exchange index, have undergone a 25% fall, and iron ore prices are down 34% from their recent March peak. Equity markets are also a leading indicator of global economic growth, and mid-last week the S&P officially closed in bear territory, down more than 20% since its early January peak of 4,818.6, before recovering into the end of the week. Fed Chair Jerome Powell acknowledged the risk of a U.S. recession last week. Further reflecting the risks of a global recession, global interest rate markets have scaled back their expectations of how high official interest rates will rise in the short-term.
Global interest rate markets have also begun to price interest rate cuts into the distant horizon. U.S. economic data highlights out this week include the final estimate of U.S. Q1 real GDP on Wednesday, where the economy is already reported to have contracted 1.5% (saar). Other important economic data includes the May estimate of the Fed’s preferred inflation measure, U.S. personal consumption and expenditure (PCE) inflation. The very-important U.S. manufacturing PMI is due on Friday. This is a good leading indicator of U.S. economy activity, which the Atlanta Fed says, has slowed to stall speed in its weekly GDPNow measure (currently 0.027%). Australian economic data due this week includes May retail sales (Wednesday), private sector credit (Thursday), CoreLogic house prices, and the final estimate of the Australian June PMI (Friday). However, it will be global factors, rather than domestic Australian economic factors that will drive direction in AUD/USD over the course of this week. The risk is AUD depreciates to its 5 December low of 0.6829 over the next few weeks.
AUD/EUR
Last week we stated the lower weekly close in AUD/EUR suggests that the market is starting to place a greater level of concern about slowing global economic growth, than simply slowing European economic growth. Therefore, the risk is rising that AUD/EUR declines to 0.6400 over the next few weeks, as the wider global growth concerns increase. This week we re-affirm that view. Any developments in global markets, including comments from various central bank speakers, to indicate that the global economy has entered a more likely period of economic
slowing, will apply downward pressure to AUD/EUR. Reflecting concerns over slowing U.S. and global economic growth, the U.S. interest rate market had priced in a peak in U.S. Fed funds interest rates of around 3.75% a couple of weeks ago. This pricing has now come down to reflect a peak closer 3.50% in early 2023, and the market pricing reflects a lower interest rate path thereafter. Economic events in the Eurozone this week include an ECB conference to discuss the global economic challenges in Sintra, Portugal on Tuesday. Eurozone industrial confidence (Wednesday), the Eurozone unemployment rate (Thursday), and most importantly, the first estimate of Eurozone June CPI inflation. Last month, Eurozone annual inflation came in at 8.1%, with the core measure at 3.8%. Both measures are well-above the ECB’s inflation target of 2.0% or less. Current interest rate pricing for the ECB’s 21 July meeting is a 25 basis point lift in interest rates, to increase the current benchmark deposit rate from -0.50% to -0.25%. Risks of a higher interest rate rise have been scaled back. While Eurozone inflation is uncomfortably high, the June French and German PMI’s unexpectedly fell much more than expected to 52.8 and 51.3 last week. Both PMI’s are closer to the crucial 50.0 level, which separates (when above 50.0) expansion in the economy, from contraction in the economy (when below 50.0).