AUD/USD
AUD/USD has lifted over the last week, rising temporarily back above 0.7000 for the first time in some six weeks, driven largely by a softening in the USD.
The USD appears to have peaked as U.S. economic growth slows and because there are some early sign’s inflation may have peaked.
U.S. economic growth contracted for a second consecutive quarter in Q2, generating a mild “technical recession” in the U.S. economy. However, with the U.S. unemployment rate historically low at 3.6%, the market is saying it does not feel like a recession at this point.
Nevertheless, consistent with a recession in the U.S. economy, the 10-year minus 2-year yield curve remain inverted, and the U.S. 10-year bond yield hit a peak on 14 June.
The U.S. 5-year and 2-year yields are following the lead of the 10-year and declining, as are global bond yields. With inflation still high, global real yields remain under downward pressure.
The pricing for the 2023 peak in the Fed funds rate has now both moved lower and been brought forward. From an earlier expectation of a May 2023 peak of 3.92%, the interest rate pricing has been lowered to 3.25%, and brought forward to February 2023. The change in this interest rate pricing has taken place relatively quickly, consistent with the recent mid-June peak in the U.S. 10-year bond yield.
Some of AUD’s strength over the last six-weeks has been partly assisted by the RBA lifting interest rates, and stronger-than expected Australian economic data.
Last week Australia’s export prices rose a solid 10.2% in Q2. Import prices lifted 4.3% over the same period. Meaning that Australia’s terms of trade further lifted in Q2. The implications are additional income is flowing into Australia’s economy, stimulating economic activity, and keeping upward pressure on Australia’s inflation.
Australian Treasurer, Jim Chalmers provided a bit of a surprise when he said that Australia’s inflation rate will peak at 7.75% in Q4 of this year. The RBA will provide an update to their inflation and GDP forecasts this coming Friday 5 August when they publish the quarterly Statement of Monetary Policy. AUD/USD is likely to show more reaction to the RBA’s updated economic forecasts.
Prior to the publication of the RBA’s updated forecasts, consensus is for a 50bpt rise at Tuesday’s 2 August RBA board meeting. Some 22 of the 23 surveyed participants are anticipating a 50bpt rate rise to bring the RBA’s cash rate to 1.85%, with one participant forecasting a 75bpt rise.
Australia’s stronger than expected Q2 CPI inflation data, which saw annual CPI lift from 5.1% to 6.1%, and the RBA’s preferred core (trimmed mean) CPI measure rise to 4.9% from 3.7%, is the key reason for the expected lift in official interest rates.
With Australia’s unemployment rate currently at a 50-year low of 3.5%, the RBA will lift interest rates by another 50bpts to help bring down inflation pressures. RBA Governor Phil Lowe has stated that he anticipates it will require positive real cash rates to bring down inflation. This of course can mean that inflation declines to make the RBA’s real cash rate positive at some point in the future.
Current OIS pricing for the peak in the RBA’s cash rate has moved lower and been brough
forward as global economic growth slows. From a 20 July peak of 2.83% for the November 2022 meeting, the OIS pricing is now for a peak in the RBA’s cash rate of 2.45% at the October 2022 meeting.
Assuming the RBA brings the cash rate to 1.85% next week, this implies only another 60bpts of rate rises. The likelihood is the RBA moves to incremental 25bpt rate rises after the August meeting.
AUD/EUR
AUD/EUR touched a high of 0.6891 during the week. The stronger lift in AUD compared to EUR over the course of the last few weeks has come despite the RBA and the ECB both lifting interest rates 50bpts in early and mid-to-late July.
Higher than expected Eurozone inflation and weaker business surveys have weighed on EUR. Ongoing concerns over European gas and energy shortages associated with the maintenance on the Nord Stream 2 pipeline has plagued the Eurozone economic outlook.
The risk of energy shortages for European business, as household get prioritised over business in future rationing, mean corporate economic activity will slow if the energy crunch continues.
While EUR/USD has lifted back to 1.0225 since dipping below parity, the move has largely been USD driven. The economic outlook for the Eurozone and AUD/EUR has not changed.
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