AUD/USD
The biggest currency event of last week, was the news that U.S. inflation eased in July. Annual CPI inflation eased from 9.1% (YoY) to 8.5% (YoY), with the core measure of inflation remaining at 5.9% (YoY). The currency market reacted by sending the USD lower, giving a lift to all boats, including the AUD, as expectations that the Fed may ease back on the pace of rate rises.
Lower than expected headline CPI inflation was accompanied by an easing in producer price inflation as well as an easing in U.S. inflation expectations. The New York Fed survey of U.S. inflation expectations showed a marked decline in inflation expectations at the short, medium, and long-term horizons over the month of July.
The easing in inflation generated a slight easing in the expected peak in how high U.S. interest rates need to lift over the cycle. This added further fuel to the possibility that the USD may have peaked in the cycle back on 14 June.
A softening USD will allow AUD/USD to grind higher. The next test for AUD/USD is the 200-day moving average of 0.7151. Back in early June, when AUD last lifted to test the 200-day moving average, it failed to lift above it, and then depreciated 8.2% to its recent 17 July low of 0.6682 low, as the USD re-strengthened.
Observing AUD since the start of the year, AUD/USD is currently down 2.0%. However, a broader measure of the Australian dollar, Australia’s trade-weighted index (TWI), that reflects the trading weights of Australia’s major trading partners, is up 4.0% over the same period.
The divergence in the Australian dollar performance between AUD/USD and Australia’s TWI reflects the fact that AUD/USD has been
weighed down by a very strong USD. While Australia’s well-performing economy, a high Australian current account surplus (equivalent to 2.9% of GDP), and a record high in Australia’s terms of trade, mean Australia’s economy is performing better than most of Australia’s trading major partners. And their currencies have fallen more than AUD has against the USD.
This week in Australia, the minutes of the RBA’s August meeting, where the RBA lifted rates 50bpts are released (Tuesday). We will get a bit more information on what the RBA meant when they said interest rates are “not on a pre-set path”. The risk is the minutes reveal a preference for the RBA to slow the pace of rate rises to 25bpt increments, rather than 50pts increments. If so, AUD may come under some temporary downward pressure.
Also, out this week we will get the Australian employment data for the month of July (Thursday). Australia’s unemployment rate, currently at a 50-year low of 3.5%, is expected to remain unchanged.
This week in the U.S. the key economic data points will be July retail sales (Wednesday), and the minutes of the FOMC’s July 27 meeting, where they increased interest rates by 75bpts to 2.5% (upper-bound).
AUD/EUR
AUD/EUR lifted over the last week to close at 0.6940. The risk is that AUD/EUR continues to grind higher and re-tests the early April high of 0.6981 over coming weeks.
Of interest, AUD was able to lift more than EUR this week as the USD softened following an easing in U.S. inflation pressures, and the associated reduction in the expected peak of how high U.S. interest rates need to lift over the cycle.
As stated in the AUD/USD section above, the Australian dollar has risen against a basket of currencies that reflects the trading weights of Australia’s major trading partners. The Eurozone (and EUR) is one of Australia’s major trading partners.
Until the Eurozone can overcome the current energy and inflation challenges, which are more significant than in Australia, AUD/EUR will remain elevated and maintain a tendency to appreciate.
In the Eurozone this week, the second estimate of Eurozone Q2 GDP is due (Wednesday) which will provide the details to the stronger-than-expected 0.7% (QoQ) GDP growth outcome. The final estimate of the July Eurozone CPI inflation data, which is expected to confirm Eurozone headline inflation at 8.6%, and core inflation at 4.0%, is also due.