Westpac: AUD May Lose Ground Vs. EUR Near Term Before Firming

Westpac note that “the Australian dollar rose sharply against the euro in response to Russia’s invasion of Ukraine. Much of the Aussie outperformance since the invasion makes economic sense. Some Eurozone members are the most directly exposed to energy supply disruptions and soaring prices.”

• “Australia in contrast is a net energy exporter and also an exporter of metals whose prices have also surged. So Australia’s terms of trade have soared, just as the Eurozone’s have slumped.”
• “The monetary policy outlook however has not been as negative for EUR as expected. At its March meeting, the ECB sparked a surge in EZ bond yields by announcing a plan to wind down bond purchases earlier than previously, given the surge in inflation. In recent weeks, the ECB has made clear that it intends to end QE in early July and raise its deposit rate from -0.5% to 0% by September.”
• “The RBA began its tightening cycle after the high Q1 CPI. Markets price the RBA cash rate above 2.50% by end-2022 versus 0.45% for the ECB key rate. Given the currently fragile global risk mood including concerns over China, AUD/EUR could dip back to EUR0.6550 (EUR/AUD up to AUD1.52/1.53) near term. But we expect the Aussie’s fundamentals to help it return to AUD/EUR EUR0.69 or EUR/AUD AUD1.45 during Q3.”