AUD/USD
AUD/USD remained within a narrower trading range over the course of last week, compared to the previous week. The narrow range in AUD was notable despite rising tensions between Russia and the Ukraine, that has created volatility in global bond and equity markets. Last week, the Australian January labour market report was relatively strong, showing stronger monthly employment growth than what was expected. A total of 12,900 jobs were added in the month, the third consecutive month of job growth. However, the percentage of the eligible workforce participating in the search for work rose, as more workers were encouraged to search for jobs. More people searching for work will make it slightly harder for the unemployment rate (currently 4.2%) to fall below the record unemployment low of 4.0%, in line with the RBA’s forecasts. The implication is that it may take longer before the RBA is willing to lift interest rates, and hence for AUD/USD to lift from the RBA’s action on official interest rates. An important piece of economic data for Australia’s inflation and labour market outlook is released this week, and that is the Australian Q4 wage price index. Wage growth is important because the RBA Governor has stated that he wants to see annual wage growth, currently 2.2% according to the wage price index measure, lift enough to keep Australia’s inflation rate sustainably in the 2%-3% target range. Consensus is for Australian annual wage growth to lift to 2.4%. While the rate of wages growth will be in the right direction, it won’t be strong enough for the RBA to consider lifting interest rate anytime soon.
As per last week’s guidance, for importers, there appears upside resistance at the 100 day moving average of 0.7244 (above that, at the 200 day moving average of 0.7349). For exporters “technical support” for AUD/USD is at 0.7050.
AUD/EUR
AUD/EUR has lifted over the last couple of weeks as Russian-Ukraine tensions have weighed more on Europe and EUR/USD, than on Australia, and AUD/USD. Consequently, AUD/EUR has undergone a 2.8% appreciation since its early February low of 0.6163, to leave AUD/EUR close to where it began the month of February (0.6330). Ironically, if there is a Russian invasion of Ukraine, AUD/EUR will initially fall sharply. This is because AUD/USD often gets sold as a proxy for risk and challenges to global economic activity. However, for exporters, any dip in AUD/EUR if there is military action is unlikely to last long, and exporters are encouraged to take advantage of such dips. Following an initial sell-off in AUD/EUR, a recovery in the exchange rate can be expected. Once the tensions in the Russia-Ukraine conflict subside, AUD/EUR is likely to ease again as economic fundamentals begin to dominate exchange rate direction, rather than geopolitical events. Regarding the relevant economic fundamentals drivers of the AUD/EUR exchange rate, the upward pressure on inflation is more pronounced in the Eurozone, than it is in Australia. We receive the final estimate of the Eurozone January inflation number on Wednesday. It is unlikely to show Eurozone inflation pressures eased much from its current high annual rate of 5.1%, which are very concerning for the ECB. However, any upside revision to the Eurozone inflation number will mean EUR/USD will appreciate, as Eurozone term interest rates move higher, weighing on AUD/EUR.
Technically, there appears a weekly downtrend in AUD/EUR, in place since early November last year. With the dominate trend in AUD/EUR a downward trend, importers might like to take advantage of AUD/EUR trading towards the top of the multi-month downward trend, at levels around 0.6335 to 0.6355. This week, the Australian Q4 wage price index will drive AUD/EUR direction this week (please see the AUD/USD section above for details).