AUD/EUR: Westpac Look For A Base Around 0.6300, Higher By Mid-Year

Westpac notes - "AUD/EUR was around 0.6400 on the eve of Russia’s invasion of Ukraine. Its surge extended to near 0.70 in Apr and Aug22. Much of the Aussie outperformance in H1 22 makes economic sense. The war is on the Eurozone’s door step and the Eurozone is among the economies most directly exposed to high energy prices. Australia in contrast is a large net energy exporter, notably thermal coal and liquefied natural gas. So Australia’s terms of trade soared, just as the Eurozone’s slumped. The Eurozone printed a record trade deficit in August of -€46bn. However, the EZ deficit narrowed to -€18bn by Dec22 as energy prices fell on aggressive stockpiling and a mild winter. Relief on EZ energy prices has reduced fear of recession and emboldened the ECB to take a more hawkish stance. This was reinforced by Feb23 core inflation rising to 5.6%yr.

A$’s yield premium over EUR has tumbled. Markets price a further 168bp of ECB tightening by Feb24, versus 86bp by the RBA (to Sep23). However, the RBA cash rate is still projected to peak above the ECB’s and there may be too much optimism priced into the Eurozone outlook. Meanwhile, Australian exporters stand to benefit from a resurgence in Asian growth, led by China. We look for AUD/EUR to find support in the 0.6300 area near term and to trend towards 0.65-0.66 by mid-2023."