AUD/USD
AUD/USD touched a two-year low of 0.6762 on Thursday last week. Intensifying concerns over slowing global economic growth, and USD strength are the main reasons for the downward pressure on AUD/USD. There is nothing on the horizon to dampen these concerns, and so it is likely that the downward pressure on AUD/USD will continue, and possible intensify this week given the importance of the upcoming U.S. economic data. For the moment, we expect only brief periods of strength in AUD/USD. U.S economic data due this week includes the June CPI inflation measure, which will be an extremely important determinant in U.S. (and global) interest rate markets, and a determinate of how high the USD will lift in the short-term. Mid-week, a reading of U.S. June industrial production growth will be released. And the all-important measure of U.S. inflation expectations (University of Michigan) will be released on Friday. Fed Chair Jay Powell informed us at the last FOMC meeting in mid-June that the lift in the University of Michigan 5-10-year inflation expectations to 3.1% was instrumental in the FOMC lifting interest rates 75bp rather than 50bpts, at the last FOMC meeting. So, the direction in inflation expectations will be key in USD direction, and how AUD/USD finishes trade at the end of the week. This week’s main Australian domestic economic data includes the June labour market data. Another 30k monthly increase in employment is anticipated, with a stable 3.9% unemployment rate. Australia’s domestic economy is doing well, and this is not the reason why AUD/USD is under downward pressure. The reason AUD/USD is under
downward pressure is outlined in paragraph one at the top of the previous page. The depreciation pressure on AUD/USD is partly driven by the concern that slower economic growth will lower commodity prices, reduce net foreign commodity income into Australia, and dampen Australia’s trade balance. However, last week it was reported that Australia’s monthly trade surplus rose to a record high of $15.9bn in May. So, it is not obvious that the slowdown in global economic activity has hit the Australian economy just yet. Nevertheless, markets are forward looking, and there is bound to be some impact on Australia’s economy over coming quarters from the global economic slowing. Rising Australian interest rates are also set to dampen Australia’s economic growth somewhat too.
AUD/EUR
EUR/USD declined over 3.5% over the course of last week. Touching a low of 1.0073 on Friday. Fresh concerns over the health of the Eurozone economy are essentially the reason for the rather out-sized decline in EUR/USD. However, another strong lift in the USD index to a fresh 20-year high was also a key reason for the near 20-year low in EUR/USD. Interest rate markets have partially scaled back the size of expected ECB interest rate rises, as WTI oil prices receded below US$100 per barrel, and slowing Eurozone GDP growth concerns dominate. Nevertheless, the persistence of high Eurozone inflation means the current market pricing for ECB interest rates is still for a 25bp rate rise on 21 July and a 50bpts rise on 8 September. This would bring the ECB’s policy deposit rate from its current -0.50% to +0.25% by early-mid September. Further interest rate rises are expected to bring the ECB’s deposit rate to 1.5% by mid-2023. The decline in EUR/USD generated a lift in AUD/EUR above the 100-day moving average of 0.6678, to 0.6754. Australian importers now have another chance to buy EUR at their highest levels in four weeks. AUD/EUR may have further short-term upside. But equally, AUD/EUR may also still be in a medium-term downward trend, since peaking in early April at 0.6981. It is difficult to be sure. Particularly given the 20-year low in EUR/USD and the intense downward pressure on EUR/USD. This week’s main factor impacting EUR continues to be the influence of the USD. Eurozone economic data this week includes the July ZEW Survey of investor sentiment (Tuesday). Eurozone investor sentiment remains at historically low levels. Levels that have in the past been associated with Eurozone recessions.