AUD/USD
The main highlight last week was the Fed’s Jackson Hole Economic Symposium. The main message to come from the Symposium was from Fed Chair Jerome Powell, who said the Fed will press on with interest rate rises, and will keep interest rate high for an extended period of time if necessary, in order bring inflation down.
The USD immediately underwent further appreciation. More USD appreciation is likely as the market adjusts to the absolute resolve of the U.S. Federal Reserve to return the U.S. economy to a period of low inflation, and price stability.
A number of other Fed officials spoke in interviews at the Symposium, repeating the Fed’s message. Kansas City Fed President Esther George, said the Fed funds rate may have to rise well over 4.0%, and St. Louis Fed President James Bullard said the Fed funds rate may have to be higher for longer.
Prior to Powell’s speech (delivered late Friday evening Australia time), the interest rate market was pricing a Fed funds rate peak of 3.77% according to the Overnight Index Swap (OIS) pricing. It is looking increasingly likely that this “peak” in the Fed funds rate might not be high enough. It is also looking increasingly likely that the pricing of interest rate cuts in 2023 will turn out to be a possible mis-pricing.
AUD/USD appears to be finding some support around 0.6850. The key factors underpinning support for AUD come from the fact that Australia is an energy exporter (at a time when Europe is experiencing an energy crisis), and from the fact that Australia runs a current account surplus equal to 2.9% of GDP.
However, further appreciation in the USD would test this level of “technical support” in AUD/USD, which appears very fragile at best. The USD will most likely attempt to lift to a new cyclical high, above its 14 July peak. This suggests AUD/USD will see further downside.
This week in Australia there is only second-tier economic data that is not likely to generate much of a change in AUD. In the U.S. the Conference Board measure of U.S. consumer confidence and the August non-farm payrolls labour market data are the key highlights. An update of average hourly earnings, which are running at 5.2% (YoY), will be one of the main highlights of the report because they are an input into inflation pressures.
AUD/EUR
AUD/EUR lifted to a new cyclical high above 0.7000 during the week, surpassing the previous early-April high of 0.9681. The combination of some modest strength in AUD/USD and further depreciation of EUR/USD was the main reason for the lift in AUD/EUR.
After closing the prior week just above parity to the USD, EUR/USD spent the majority of last week below parity to the USD. As detailed last week, and illustrated in the accompanying chart, the European Union aims to refill Europe’s gas storage levels to 80% of capacity by November 1st 2022, in an attempt to prepare for peak winter demand.
However, even with 100% full gas storage tanks, Europe’s energy supply would run out within three months, if Europe’s gas supply was cut off. The lack of energy security in Europe is a large factor weighing on EUR/USD. The other factors weighing on EUR are the Eurozone’s high level of inflation, and of course, the strength in the USD.
Last week, the minutes of the ECB’s July meeting, where interest rates were raised 50bpts, noted “even a recession would not necessarily diminish upside inflation risks, especially if it was related to a gas cut-off”. Until the energy crisis in Europe can be solved, AUD/EUR will maintain a tendency to appreciate.
This week in the Eurozone, the August measure of Eurozone CPI inflation is due. Some relief from Eurozone inflation is sought, with headline CPI inflation at 8.9% (YoY) and core CPI inflation at 4.0% (YoY).