With the European Central Bank (ECB)
interest rate decision, monetary policy statement and governor’s press
conference coming on Thursday, the Single Currency is succumbing to US dollar
strength, as are all the other majors. This might give Mario Draghi and his
team some comfort, and even a little more room for manoeuvre.
The pressing concerns of the ECB are
the deflationary tendencies in the Eurozone countries. A weaker Euro is
consistent with a rise in inflation, even if it is not to the liking of citizens,
who have to pay more for what they buy from abroad and get less value when they
travel to non-Euro regions.
The big question now is whether the
ECB will rest and allow the mighty dollar to continue its work or will it,
like any good general, press home the advantage that this has given them and take
measures that will deliver more inflationary tendencies? We will know on
Thursday
…
but the Aussie fares even worse
In the chart above, a rise in EUR/AUD
means relative weakness in the AUD (Australian dollar). Now this pair has
broken through its 200 day EMA (blue line).
After many months of attempting to
talk down the currency (“jawboning”, as they call it Down Under), the governor
of the Reserve Bank of Australia, Glenn Stevens, must be quietly content with
the trajectory of the Aussie at present.
Something of a perfect storm has hit
the currency – US dollar strength, as alluded to above; a definite softening of
the Chinese economy, which has been very good to Australia for many years; a consequent
collapse of hard commodity prices, especially Iron Ore; falling employment and
now a dismantling of the Carry Trade, where investors chase yield in high
interest rate jurisdictions to set against money borrowed in those countries that
have lower rates. Once this last process starts it becomes a self-perpetuating
one, as a drop in the value of the higher rate currency is bad for Carry Trade
profits, so the institutions get out, fast.
Even the success of their neighbours
in New Zealand, in reducing the value of the Kiwi, is tending to drag the
Aussie down in sympathy.
Rather belatedly, the RBA, in
conjunction with the mortgage regulators in Oz, have begun to consider
so-called macro-prudential measures, or restrictions on borrowings for real-estate
purchases, in order to deflate what is looking more and more like a property
bubble. This, too, is seen as a negative for the Australian unit.
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