AUD/USD
AUD/USD declined to a fresh two-year low of 0.6711 last Monday as the USD strengthened, and EUR fell towards parity (see below).
The USD continued to strengthen after a better-than- expected U.S. June non-farm payrolls labour market report on the previous Friday. Monday’s trade gave the Asian and European market an opportunity to react to the strong U.S. economic data.
While AUD spent the rest of last week attempting to recover from the 0.6711 low, the USD further strengthened after the release of a higher-than-expected U.S. June CPI inflation release, which saw U.S. inflation rise to a 40-year high of 9.1% (YoY).
The concern over higher inflation triggered some FOMC officials, notably Cleveland Fed President Loretta Mester, to suggest that the Fed could lift interest rates by at least 75bpts at their next meeting on 27 July.
Reflecting not just concerns over high U.S. inflation, but the global concern over high inflation pressures, the Bank of Canada surprised markets by lifting interest rates 100bpts to 2.50% at last week’s policy meeting. Further surprises came from the Central Bank of Philippines and the Monetary Authority of Singapore, who both lifted interest rates and tightened monetary policy, following unscheduled policy meetings.
These concerns over higher global inflation are strengthening the USD, as risk aversion gravitates investors toward the USD, and as participants anticipate what higher global inflation may mean for the U.S. Federal Reserve.
A better than expected Australian June labour market report, which was Australia’s unemployment rate fall to multi-decade low of 3.5%, and below the RBA’s 2023 forecast, was not enough to lift AUD/USD.
AUD/USD is going to struggle to lift while the concerns over slowing global economic growth persist, and the USD continues to strengthen. Confirmation last week that China’s real GDP contracted -2.6% (QoQ) in Q2, only reminds us that the global economy faces challenges.
China’s economy contracted in Q2 under the weight of China’s covid lockdowns, and troubles in China’s property sector. The slowdown in China’s property sector is impacting China’s banking sector, as well as China’s construction sector.
The prices of Australia’s largest commodity export iron ore have fallen 41% to US$99.00 per tonne since their recent early April peak. The risks are towards further decline in AUD/USD over coming weeks.
AUD/EUR
EUR/USD traded below parity to the USD last week as concerns over a slowing Eurozone economy, energy supply issues, and a strong USD, weighed on the currency.
Europe’s energy-supply challenges as a result of the Ukraine-Russia war, and a strengthening USD, have been behind the depreciation of EUR/USD. However, also helping to drive the EUR/USD to 20-year lows, has been a collapse in Eurozone’s current account surplus.
The Eurozone recorded its second monthly current account surplus for the first time since 2011, as high energy prices lifted the Eurozone import bill. A shift from a regular large current account surplus to a current account deficit is an important factor in diving lower average levels in a country’s exchange rate.
This week in the Eurozone, the final estimate of the June CPI inflation data, which showed annual inflation at 8.1%, is released (Tuesday). On Thursday, the ECB meets to decide upon interest rates. Earlier indications from the ECB were for an initial 25bpt rate rise. However, the risks have risen that the ECB surprises, and lifts interest rates 50bpts.
While a surprise 50bpt rate rise might temporarily lift EUR, it won’t be a game changer. Following a stronger than expected Australian June Australian labour market report, which saw Australia’s unemployment rate decline to 3.5%, the support for AUD/EUR is very good.
The balance of risks has now shifted toward AUD/EUR lifting to 0.6800. This is partly because Australia’s strong labour market report has lifted the possibility that the RBA could raise interest rates as much as 75bpts at the next RBA meeting.