Westpac: AUD/EUR Looks Vulnerable To Further Declines

Westpac note that “AUD/EUR was around EUR0.6400 on the eve of Russia’s invasion of Ukraine. Its surge extended to near EUR0.70 in Apr and Aug22. Much of the Aussie outperformance in H122 made economic sense. The Eurozone is among the economies most directly exposed to high energy prices.”

• “Australia in contrast is a large net energy exporter. 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 -€11bn by Jan23 as energy prices fell on aggressive stockpiling and a mild winter, relieving pressure on the euro.”
• “This relief has reduced fear of recession, the ECB in March revising up its 2023 GDP forecast to +1%. The ECB also erred on the hawkish side of expectations by sticking with the indicated 50bp hike. As the chart shows, A$’s yield premium over EUR has tumbled and in the case of the 2yr spread, has evaporated. Markets price a further 45bp of tightening, versus a small risk of easing from the RBA.”
• “We remain positive on AUD/EUR multi-month, given Australian exporters stand to benefit from a resurgence in China’s economy, while ongoing war in Ukraine could reignite the energy price squeeze in Europe later in 2023.”
• “But near term, AUD/EUR looks vulnerable to further declines, towards fresh lows since August 2021, in the EUR0.60/61 zone.”