Currency Update by Ian Cragg from Send.
The AUD experienced mixed performance against major currency pairs last week.
The AUD/USD pair saw robust upward momentum, driven by an optimistic domestic rate outlook and the Federal Reserve's decision to pause interest rate hikes. On the other hand, the AUD/EUR pair remained relatively stable, with market sentiment staying neutral amid expectations of the US economy outperforming the eurozone. The AUD/GBP pair experienced minor losses as the UK anticipates a rate hike from the Bank of England. In contrast, the AUD/NZD pair witnessed volatility due to divergent economic data from both countries.
Investors should closely monitor economic developments and central bank policy shifts in Australia, the US, the eurozone, the UK, and New Zealand in the coming weeks to make informed decisions on these AUD currency pairs.
Let`s dive in for more details.
AUD - USD
The AUD/USD currency pair experienced robust upward momentum last week, primarily driven by an optimistic domestic rate outlook and the Federal Reserve's decision to pause interest rate hikes for the time being. This strong performance has positioned the Australian dollar for its seven-month best week. Meanwhile, the bond market continues to price in recession risks.
Recent economic data reveals that the U.S. CPI report showed a smaller-than-expected increase of 0.1% in May, leading to a rally in U.S. stocks that reached their highest level in 14 months. The Federal Reserve held interest rates steady but signalled a potential increase of 50 basis points by the end of December. Furthermore, U.S. producer prices fell more than anticipated in May, resulting in the smallest annual increase in producer inflation in nearly 2-1/2 years.
In Australia, the Reserve Bank of Australia (RBA) surprised the market with a June cash rate rise, significantly boosting the AUD/USD pairing. As a result, the market sentiment currently favors a buy position for the AUD against the USD. The Australian dollar has benefited from a hawkish domestic rate outlook and optimism surrounding the Federal Reserve's rate pause, leading the AUD/USD pairing to gain 2.36% last week.
Looking ahead, investors should closely monitor economic developments in both the U.S. and Australia, as well as any shifts in central bank policy. The Federal Reserve's decision to pause rate hikes this month may offer further support for the Australian dollar, while the RBA's unexpected cash rate rise has already breathed new life into the AUD/USD pair.
However, investors must consider potential headwinds and risks, such as the ongoing bond market pricing in recession risks.
AUD - EUR
The AUD/EUR currency pair experienced relative stability over the past week, with the Australian dollar gaining 0.45% against the euro. Market sentiment for this pairing remains neutral as investors consider the prospects of the US economy outperforming the eurozone, making the US dollar a more attractive currency to buy compared to the euro.
Recent key economic data includes the European Central Bank (ECB) raising interest rates by 25 basis points to 3.5%, marking its eighth consecutive increase and reaching the highest level in 22 years. Additionally, ECB staff revised their inflation forecasts, excluding energy and food, particularly for this year and next, due to past upward surprises. As a result, the inflation projection for this year was raised from 4.6% to 5.1%. Furthermore, ECB President Christine Lagarde indicated that another rate hike in July is highly likely and emphasized that the central bank still needs to address high inflation rates.
The current market sentiment for the AUD/EUR pairing is influenced by the preference for the US economy to perform better than the eurozone, making the US dollar appear more attractive for investors than many other currencies, including the euro.
The ECB's recent rate hike and the possibility of another increase in July may support the euro. However, ongoing concerns about high inflation rates in the eurozone could limit its gains against the Australian dollar.
AUD - GBP
The AUD/GBP currency pair experienced a relatively flat week, with the Australian dollar losing 0.04% of its value against the British pound. The upcoming week is heavily focused on the UK, with significant events such as the release of the CPI data on Wednesday and the Bank of England (BoE) rate decision on Thursday. Market participants anticipate a 25 basis point rate hike, with an outside chance of a 50 basis points hike.
Elevated UK average earnings and widespread price pressures have proven resilient in the face of tighter financial conditions. However, inflation is anticipated to move sharply lower for the remainder of the year due to base effects and lower energy prices taking effect.
The current market sentiment favours selling the AUD for GBP, as the expectation of a rate hike this week bolsters the GBP. Despite various headwinds, this sentiment is driven by the anticipation of the BoE's actions and continued resilience in the UK economy.
Investors should closely monitor the UK's economic developments, particularly the CPI data release and the BoE's rate decision, to make informed decisions on the AUD/GBP currency pair. It is essential to consider how these events may impact the GBP and whether it will continue strengthening against the AUD. While the current market sentiment leans towards selling the AUD for GBP, any unexpected changes in economic indicators or central bank policies could quickly alter the outlook for this currency pair.
AUD - NZD
The AUD/NZD currency pair experienced a turbulent week as the Australian and New Zealand dollars responded to domestic and global economic data. The Australian dollar derived strength from slowing inflation and robust jobs data, while the New Zealand dollar lost some momentum due to downward revisions in annual GDP and mixed economic indicators.
Key economic data include Australia's Q1 consumer inflation slowing to 7% from the previous quarter's 30-year high of 7.8%, surpassing forecasts of 6.9%. Additionally, Australia's economy grew at a modest 0.2% in Q1, marking the slowest expansion rate in six quarters due to weakened household consumption. The Australian dollar reached its strongest level since February 21st, driven by monetary policy divergence between the Federal Reserve and the Reserve Bank of Australia.
In contrast, New Zealand's annual GDP growth for the year ending in March was revised down to 2.2%, missing expectations of 2.6%. Statistics New Zealand reported a 0.3% month-on-month increase in food prices for May, with a year-on-year increase of 12.1%. Furthermore, the real estate institute of New Zealand (REINZ) revealed a slight decrease of -0.4% in house sales year-on-year for May, recovering from the -15.3% decline in April.
As a result, the market sentiment currently favours a strong buy position for the AUD against the NZD, with the Australian dollar benefiting from positive economic data and a more pronounced monetary policy divergence compared with the New Zealand dollar.
Looking ahead, the Reserve Bank of New Zealand (RBNZ) will face challenges in navigating a delicate balance between managing stubbornly high inflation rates and avoiding a recession when they meet on July 12th. With the overnight index swaps (OIS) market pricing no more hikes by the RBNZ this year, the overnight cash rate (OCR) is expected to remain at 5.50%.
Meanwhile, the Reserve Bank of Australia (RBA) may find their July meeting increasingly interesting due to a dip in the unemployment rate and the addition of 75.9k jobs in May, which could reignite price pressures.
Investors should closely monitor economic developments in both countries and any shifts in central bank policy to make informed decisions on the AUD/NZD currency pair.
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