AUD/USD
AUD/USD has been in a relatively tight range for a week-and-a-half (0.7465 to 0.7540), as it consolidates the 4.5% appreciation it has had since the Fed lifted rates on March 16.
It will take a particular catalyst for AUD/USD to break out of that range. The stronger than expected U.S. March non-farm payrolls data released late last week was not enough to shake AUD out of its current range.
Of particular note, Australian 10-year and 3-year bond yields, currently at 2.83% and 2.37% respectively, also appear to be consolidating their recent lift. It is not unusual for both Australian bond yields and the AUD to enter a period of consolidation.
This coming week, the domestic economic highlight is the RBA’s board meeting on Tuesday (April 5). However, there is unlikely to be enough in the RBA’s post-meeting statement to generate the catalyst to move AUD out of its tight range.
That eventual catalyst is likely to come from offshore developments or once the RBA definitively signals they are ready to raise interest rates. Some potential catalysts to move AUD out of this period of consolidation include USD movements generated by the FOMC’s March meeting minutes (on Thursday). The FOMC minutes will detail the discussions the FOMC had as they commenced the tightening cycle.
Other potential catalysts to move AUD out of its current range include equity market or commodity price developments, particularly associated with the Ukraine conflict. The recent decline in oil prices, led by an increase of 1 million barrels per day over the next three months from the U.S. Strategic Petroleum Reserves, and a modest increase in OPEC’s oil supply was not enough. Since the Ukraine conflict commenced on 24 February, AUD has out-performed other oil-exporting country’s currencies.
Consensus is for no change at Tuesday’s RBA meeting. However, the current market pricing
for a +15bp rise to bring the cash rate to 0.25% remains fully priced for the RBA’s June 8 meeting. With subsequent 0.25% increases priced in at the July, August, September, October, November, and December meeting, bringing the RBA’s cash rate to 1.75% by the end of the year.
It is up to the RBA to bat that pricing down if it is really against the commencement of the tightening cycle in June. It would appear unlikely the RBA will do that at Tuesday’s meeting with the inclusion of any additional forward guidance beyond “the Board is prepared to be patient as it monitors how the various factors affecting inflation in Australia evolve.”
Australian inflation expectations, as measured by the Melbourne institute are the other domestic economic highlight (on Monday). Currently this measure of inflationary expectations is the same as the current annual headline CPI inflation figure of 3.5%. There is symmetrical risk on the inflation expectations outcome. By way of comparison, the Australian 5-year inflation swap has eased over the last two weeks, and currently trades at 2.92%.
Australia’s international trade balance on Thursday rounds out the domestic economic data week. Another strong trade surplus around A$12 billion, led by another record high in exports, is expected.
The release of the RBA’s semi-annual Financial Stability Review is then released on Friday. The outside risk is that it highlights some minor mortgage stress in a minority of home buyers. But with commercial banks flush with cash, and overall lending relatively prudent, it should not raise the attention of markets and move AUD, despite the surge in mortgage lending and house prices during the last 12 months.
AUD/EUR
Consistent with historical experience, the USD has softened since the Fed began lifting interest rates in mid-March. The currency market “brought forward” the USD strength prior to the Fed lifting interest rates. The currency market is now in the gentle process of giving back some of the 10% lift in the USD since mid-2020, as the U.S. economy slows in response to higher U.S. interest rates. The upshot to the modest softening in the USD, is that both AUD/USD and EUR/USD have lifted since the Fed began lifting interest rates. EUR/USD has also been supported by a 25% decline in the price of WTI crude oil since its mid-March high of US$130 per barrel, to below US$100. However, with both AUD/USD and EUR/USD appreciating over the same period, AUD/EUR has showed sustained strength in the 0.6700 to 0.6850 region. We have mentioned previously that AUD/EUR will remain elevated; supported by AUD strength and softness in EUR, while the conflict between the Ukraine and Russia continues. It will also be difficult for EUR to lift while high inflation and slowing GDP growth (ie. stagflation) grip the Eurozone economy. Late last week, the economic data showed Eurozone CPI inflation rose a large 2.5% (MoM) to be 7.5% (YoY) in March. The ECB are worried about inflation but remained concerned high oil prices will slow the Eurozone economy. Eurozone bond yields lifted on expectations that this may bring forward the timing in which the ECB will lift interest rates. However, EUR/USD was unable to sustain a rise because stagflation typically weighs on an exchange rate. Expect AUD/EUR to remain elevated for now.