FX Daily: More attention on fiscal plans in Australia and Germany

AUD and EUR fragile if they break below key support levels
Group Research, Philip Wee11 Oct 2022
    Photo credit: Unsplash Photo

    Commodity-led AUD and NZD depreciated most on risk aversion by 1.1% and 0.8%, respectively. Dow, S&P 500 and Nasdaq Composite fell 0.3%, 0.8% and 1% respectively. Nasdaq closed at a new year’s low of 10542. Although NZD closed at 0.5567, its lowest level since April 2009, it has yet to breach the intra-day low of 0.5470 seen during the Covid-19 outbreak in March 2020. However, AUD closed at 0.63 yesterday and is farther away from its Covid lows of 0.5743 (daily close) and 0.5510 (intra-day low). Hence, many expect the Oz to keep falling faster than the kiwi. More so after the Reserve Bank of Australia delivered a smaller 25 bps hike to 2.60% last week following four consecutive months of 50 bps increases. On 13 October, another drop in Australia’s consumer inflation expectations, which fell from 6.7% in June to 5.4% in September, could add pressure. The focus is also on the federal budget announcement on 25 October. Prime Minister Anthony Albanese does not intend to break the Labour election pledge to keep the Stage Three tax cuts. The government also wants to lift defence spending from 2% to 2.2% of GDP.

    EUR depreciated 0.4% to 0.97. Eurozone Sentix Investor Confidence fell to -38.3 in October, its worst reading since May 2020. More importantly, the current situation index plunged to -35.5 from -26.5. Investors were despondent over the energy crisis and wary of another escalation in the Russian-Ukraine war. Bloomberg consensus sees three quarters of negative growth for the German economy from 3Q22 into 1Q23, amidst double-digit inflation in 4Q22. The EU 10Y bond yield rose to 2.342% (the highest since 2011) from 1.917% a week ago after Germany’s proposed EUR200bn (5% of GDP) aid plan to help its people cope with the energy crisis drew criticism from EU member countries. EUR has an important support level of just below 0.96. Failure to hold this could send it into the 0.8270-0.95 range seen in 2000-2002.

    DXY appreciated the fourth day by 0.3% to 113.14. Fed Vice Chair Lael Brainard tempered gains with her words of caution over the recent increase in global economic and financial uncertainties. However, don’t expect Fed Chair Jerome Powell to back down on the Fed’s commitment to control inflation at the IMF and World Bank Annual Meeting. The markets have discounted a fourth 75 bps hike to 4% at the FOMC meeting on 2 November. Chicago Fed President Charles Evans affirmed the Fed’s latest projection for rates to be restrictive above 4.50% early next year before moving to a wait-and-see mode. On 13 October, Bloomberg consensus expects US CPI inflation to fall from 8.3% YoY in August to 8.1% in September, still high above the 2% inflation target. The Fed will be concerned if core inflation rises above the 6.5% high in March. Today, Cleveland Fed President Loretta Mester, who is speaking today, needs more evidence to consider scaling down the pace of hikes.

    Philip Wee

    Senior FX Strategist - G3 & Asia


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