AUD/USD
AUD/USD declined after the RBA raised interest rates 50bpts (as expected) to 1.85% last week. The main reason for this was, the RBA updated their forward guidance to say while they place a “high priority” on the return of inflation to the 2-3% range, they are “not on a pre-set path”.
The market interpreted this to mean the RBA may slow the pace of rate rises, which, despite sending AUD to its low for the week, was not a totally unexpected announcement from the RBA. The RBA meet monthly, while most other central banks meet less frequently.
The RBA revised up their inflation forecasts for 2022 to 7.75% (previously 6.0%), and 2023 to 4.25% (previously 3.25%). The RBA added a 2024 inflation forecast of 3.0%, which is the top of their 2% to 3% inflation target. GDP growth projections were revised down to 3.25% for 2022 (previously 4.25%), and 1.75% for 2023, (previously 2.0%). The RBA added a 2024 GDP forecast of 1.75%.
Of note, while the RBA revised down 2022 GDP growth, they also made the observation that the Australian economy has been “resilient”. Also notable, the RBA stated that “Australia’s terms of trade are expected to remain on a higher trajectory than previously forecast, even as they decline from a likely historical high in the June quarter”. This suggests the RBA have some confidence the AUD will hold at reasonable levels because Australia’s terms of trade are a large input into their internal AUD exchange rate model.
It is worth pointing out, that while AUD/USD is down almost 4.0% since the start of the year, Australia’s broad trade-weighted index (a measure of the AUD against a basket of currencies of Australia’s major trading partners), is up by around the same margin.
This indicates the strong USD has been the major driver of the depreciation in AUD/USD. It also indicates the appreciation of AUD/EUR and other currencies, including AUD/GBP and AUD/Asia has been because their currencies have depreciated more than AUD vis-a-vis the USD.
Australia being a net energy exporter and having a current account surplus of 2.9% of GDP has been a major contributing factor in AUD’s appreciation on a TWI basis. Since the start of the year, Australia recorded another record monthly trade surplus in June, reflecting a pick-up in service export activity (travellers and education) as well as a strong lift in exports to China – the largest seen all year.
The starting point for this week’s currency trade is a stronger USD following last Friday’s stronger than expected U.S. July non-farm payrolls labour market report. Most notably, U.S. average weekly wage growth was stronger than expected, indicating a risk of second round price pressures. It is possible the USD could re-strengthen and apply downward pressure on AUD/USD.
AUD/USD direction will be influenced by the release of the U.S. July CPI and fresh release of the University of Michigan inflation expectations survey for August. In both cases, there is a reasonable chance of a decline in inflation and inflation expectations, which may see the resurgent USD lose some strength, and provide AUD/USD with some support.
AUD/EUR
AUD/EUR has spent an increasing amount of time above 0.6800 as Australia’s economic data continues to roll in on the impressive side (despite the global headwinds), and as Europe’s economy continues to face the challenges of energy disruptions and much higher inflation.
Having said that, despite the decline in European consumer confidence, the first estimate of Eurozone Q2 real GDP growth was much stronger than expected, at 0.7% (QoQ), and the Eurozone’s unemployment rate eased 0.2 to 6.6% in the June quarter, a cyclical low.
Furthermore, now that crude oil prices have returned to their levels prior to the 24 February Russian invasion of Ukraine, some of the price pressures on the European economy are likely to ease. Europe is still facing gas restrictions (some self-imposed) which will continue to challenge industry capacity.
There are some encouraging signs that energy price inflation may begin to ease in Europe, and that the month of June was a stronger month in the Eurozone economy, with firmer than expected German and French industrial production growth.
If this is the case, further appreciation in AUD/EUR may be difficult to achieve as EUR adjusts to erase some of its recent depreciation in line with an easing of Eurozone stagflation concerns. If so, a decline over coming weeks to the 100-day moving average of 0.6726 ispossible.
A lower close to the week in AUD/EUR after the stronger-than-expected U.S. July labour market report, also suggests AUD/EUR could trade a little-lower and/or range trade for a while.