Currency Update - August 2nd

For the most part, the AUD had a good week against other major currency pairs. It gained some ground against the USD, EUR and NZD while losing some ground to the GBP. The overall trend seems to be in favor of the AUD for now, but as the recession materializes, investors may switch to risk off positions soon, which could trigger a market correction. In any case, it's worth keeping an eye on the AUD in the coming weeks.

AUD - USD

The AUD increased by 0.73% in value over the last week, against the USD. The last two weeks have shown good recovery and recent developments suggest that the AUD may gain more momentum against the weakening USD but this is going to come at the cost of high volatility.

After hinting that the likelihood of a 100 bps rate hike was less than 50%, FED raised policy rates by 75 BPS last week but this move could not do much to uplift the weakened USD. With CPI numbers out of control, the FED is under pressure for more rate hikes but two consecutive quarters with almost 0.9% contraction in GDP indicates that a recession in the US is well underway. This has put FED in a tight spot, which can also be seen by the mixed signals coming from FED representatives in the last two weeks.

Regardless of what the news may suggest, recession in the US has begun. This is good news for the AUD. While this may make exports more competitive, pressure from imports is going to ease which will be helpful for the current account surplus. 

The Australian economy, like we have always stated, is fundamentally strong. CPI data released late last week is lower than expected. This gives more breathing space to the RBA which is set to decide on another rate hike on Tuesday this week. 

The analysis so far indicates that the AUD will continue to gain ground against the USD. However technical analysis of the market indicates that the market is neutral for the AUD - USD pairing. Why? Because of risk sentiment. 

Two consecutive quarters of GDP reduction are a recession, no matter what the media may say. This is going to create a ripple effect and soon investors will switch from their risk on position to risk off position and make a beeline for safe haven currencies. 

AUD - GBP

The AUD - GBP pairing has broken the 3 week long bullish cycle and the AUD has gone into a downward trend against the GBP, losing 1.58% of its value in just one week. The main driver behind this rise in value for GBP is the speculation that the Bank of England(BoE) may be gearing up for the biggest rate hike in three decades. 

Market experts believe that the BoE will do anything to bring the rate of inflation under control. This looks like a last ditch move by the BoE to intervene amidst ongoing political uncertainty. Apart from this speculation, there appears to be no other reason why the GBP would experience such a sudden surge in value. 

The market is now waiting to see how the BoE will act on Thursday, when they announce their latest monetary policy decision. If rates are indeed hiked by 50 bps, as is widely expected, then the GBP is likely to continue its upward trend for a while.

However recovery from Brexit and the ongoing political turmoil is weakening the GBP, which is why this pairing will undergo correction as soon as speculative hype dies down. For now, technical analysis indicates that the market is neutral for this pairing for the next week. 

AUD - EUR

The AUD is still bullish against the EUR but it seems to be losing some of its momentum. The EUR is fundamentally weak at this point and this weakness is being driven primarily by the energy crisis.. 

Inflation in the Eurozone is climbing and the ongoing war in Ukraine is only adding more to the uncertainty. Keep an eye on political developments as any potential conflict between Kosovo and Serbia can further weaken the EUR. 

Technical analysis indicates that investor sentiment for the next week is to buy AUD against the EUR.  

AUD - NZD

The AUD - NZD pairing gained almost 0.10% of its value last week. Both AUD and NZD had a good second week, as the greenback weakened and left space for risk leveraged currencies. 

The AUD started the week on a high note against the NZD, gaining in value till mid week. The release of lower than expected CPI data resulted in a drop of almost 40 bps in bond yields, as investors dropped the expectation of another hike in policy rates on 4th August. 

In the short term, based on technical analysis, the market favors buying sentiment for the AUD against NZD for the next week.