AUD/EUR: Westpac: Euro Still Fragile As War Rages

Westpac note that “Russia’s invasion of Ukraine sent the Aussie soaring against the euro. A degree of Aussie outperformance since the Russian invasion of Ukraine makes economic sense. The war is on the Eurozone’s doorstep and some Eurozone members are the most directly exposed to energy supply disruptions and soaring prices.”

• “Australia in contrast is a net energy exporter and an exporter of metals whose prices have also surged. So Australia’s terms of trade have soared, just as the Eurozone’s have slumped. Australia's huge current account surpluses are historically unusually supportive of AUD on crosses and go a long way to explaining its limited sensitivity to recent equity volatility.”
• “The monetary policy outlook however has not been quite as negative for EUR as expected. At its 10 March meeting, the ECB sparked a surge in Eurozone bond yields by announcing a plan to wind down bond purchases earlier than previously, given the surge in inflation.”
• “The RBA continues to push back on the idea of any change in policy settings near term though it notes growing inflation risks and is upbeat on Australia’s growth prospects. Short term, the Aussie should chop higher, back towards AUD/EUR EUR0.68 or EUR/AUD AUD1.47, though our end-June forecast is AUD/EUR EUR0.66 or EUR/AUD AUD1.51/1.52, so long as Europe eventually finds some relief from energy prices.”