AUD/USD
AUD/USD endured a surge in volatility last week. After opening around 0.7500, AUD/USD lifted more than 2.0% to a high of 0.7661, before declining to close the week lower at 0.7458.
The initial surge and reason for last week’s 0.7661 high in AUD/USD was because the RBA delivered a more hawkish economic statement at their board meeting.
The RBA made three notable changes to their monetary policy statement. First, they removed the sentence “the Board is prepared to be patient as it monitors how the various factors affecting inflation in Australia evolve.” And instead replaced that sentence with “the Board will assess … incoming information as its sets policy to support full employment in Australia and inflation outcomes consistent with the target.”
Second, the RBA removed the sentence “the Board is committed to maintaining “highly” supportive monetary conditions to achieve its objectives of a return to full employment in Australia and inflation consistent with the target.” And thirdly, the RBA for the first time, acknowledged … “there are, however, some areas where larger wage increases are occurring” in their assessment of wages growth, and their subsequent ramifications for inflation.
The RBA have also stated they will be watching “important additional evidence … on both inflation and the evolution of labour costs”. More specifically, this “evidence” will be the Australian Q1 CPI inflation released on April 27. A high quarterly inflation outcome will most likely encourage the RBA to commence lifting interest rates by May or early June.
This Thursday, the Australian March labour market report is released. It is likely to affirm that the Australian labour market remains strong, with further growth in the number of people employed, applying downward pressure to the already historically low unemployment rate of 4.0%. The economic data should be supportive for AUD.
The near-term challenge for the immediate direction in AUD/USD remains the strength of the USD, as markets re-assess the appropriate value of the USD in response to the upbeat minutes of the U.S. March FOMC meeting. The near-term risk is AUD/USD remains under some downward pressure as USD strength re-asserts itself on the expectation the U.S. Fed will deliver a series of 50bp interest rate increases, rather than 25bp interest rate increases.
On Monday, the March reading of U.S. CPI inflation is published. Consensus is for a lift in the annual rate of U.S. inflation from 7.9% to 8.4%. Anything higher than 8.4% will likely generate further strength in the USD, and lead to some additional downward pressure on AUD/USD. Over the course of the week, some “technical” support for AUD/USD may be offered around 0.7360.
AUD/EUR
AUD/EUR pushed higher again last week, reaching a new cyclical high of 0.6981. The impact of a firmer USD in response to the minutes of the U.S. FOMC meeting, lowered both AUD/USD and EUR/USD over the course of the week. However, EUR/USD declined by a greater percentage than AUD/USD because of the on-going concerns about the impact of high energy prices and the conflict in Ukraine, on the Eurozone economy.
There are underlying concerns about the strength of the Eurozone economy, which continue to weigh on the EUR exchange rate. However, ECB Governing Council member, Yannis Stournaras, offered some comforting comments, saying that the chances for stagflation and recession are very low. Nevertheless, until the Eurozone economic data improves, AUD/EUR will remain elevated, and well-supported; particularly given the fact that Australia’s economy continues to show positive signs, and interest rate markets are becoming more confident after last week’s RBA meeting, that the RBA will begin raising interest rates well-before the ECB. AUD/EUR may endure some modest intra-day volatility as news of the first round of the French Elections begins to filter through early Monday morning Sydney time. The opinion polls between the incumbent President Macron, and Le Pen have narrowed significantly. It is expected the two candidates will square off in the final election on April 24. The ECB meets this coming Thursday. Although this is not a meeting where the ECB discusses interest rates, the market will continue to look for clues on the ending of the asset purchases (quantitative easing) and potential timing of the start of the ECB’s rate hike cycle. Despite the challenges facing the Eurozone economy, it is increasingly looking likely that Eurozone interest rates could begin to rise in September because of inflation, and the ECB’s official policy deposit interest rate could lift from its current -0.50% to 0.0% (or 0.25%) by year-end. Currently there are 70 basis points (0.70%) of ECB interest rate increases priced by the market for 2022. Reflecting the increased chances of further ECB interest rate rises, Eurozone 2-year yields have lifted out of negative territory, and are now back to positive for the first time since August 2014.
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