Euro vs Aussie: Looking Beyond the RBA

<p>This evening’s Australia’s February jobs figures (due Thursday 0:30 GMT/London) are expected to show a 10K rise, following a similar print in January and a […]</p>

This evening’s Australia’s February jobs figures (due Thursday 0:30 GMT/London) are expected to show a 10K rise, following a similar print in January and a decline of 3.8K in December.  The three-month moving average of 9K is well below the 30K prevailing last summer. The unemployment rate is expected to edge up to 5.5% from 5.4%.

Despite the weakening dynamics in Aussie employment, markets are approaching the currency via the extent to which the Reserve Bank of Australia is near the end of its easing campaign, as opposed to the extent of new easing ahead. Other macro indicators show some resilience. The Westpac-Melbourne Institute Consumer Confidence Sentiment is at the highest since December 2010 and retail sales began showing signs of a bottoming.

Australian money markets have tempered their expectations for further RBA rate cuts, with only one 25-bp rate cut being priced in by year-end. This already has supported the Aussie as of late. And with the AUD/USD exchange rate well below the high profile 1.05-1.07 territory, the RBA may not show the same concern as three months ago. Some participants cite upcoming Chinese tightening as a case for a China slowdown. Not only the PBOC is unlikely to raise rates any time soon, but history has demonstrated that previous tightening from Beijing did not rail risk appetite nor the Aussie.

On the Eurozone front, the remaining question revolves around Italy’s election choice. Last month’s elections produced a hung parliament, with the center-left coalition led by the Democratic Party (PD) winning a majority in the lower house but failing to do so in the Senate. Despite a spike in the Italian borrowing costs right after the inconclusive election results, interest rates have declined markedly. The yield on 10-year Italian govt bonds fell to 4.6% from the 4.95% high attained in February 27. The ongoing stabilisation in Italian paper and the euro currency stems from lingering hope that a temporary government may be formed to ensure reform continuity. Whether such a government would avoid a second round of elections shall depend on the dynamics of power inside the PD.

There is a possibility that prolonged elections stalemate would force Italy to apply for the ECB’s Outright Monetary Transactions in order to cap any re-surging gains in bond yields. But in order for the OMT to be approved, Italy would have to abide by the required conditionality, which is the point of rupture in the elections. Until any conclusive outcome is obtained, EUR shall remain pressured. And the Aussie is potent candidate to cap the single currency.

EUR/AUD has broken its seven-month trendline support, eyeing its next target at the 200-DMA of 1.2420s. With the EUR/USD struggling to hold above its own 55-WMA of 1.2880, further weakness in EUR/USD is likely to broaden selling into other EUR crosses, including the Aussie. Watch for a weekly close below 1.2490, which would pave the path for next key target at 1.2170-80.

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.