Ahead of the weekend the AUD EUR exchange rate was making gains, boosted by disappointing German data and ongoing Brexit worries.
After Standard & Poor’s opted to downgrade Australia from its AAA credit rating on Thursday the strength of the ‘Aussie’ (AUD) started to fade a little. The ratings agency indicated that its primary motivation for the cut was concern over the current federal budget, a comment that seems worrying for the outlook of the domestic economy. This muted some of the earlier optimism that had been generated by the Reserve Bank of Australia’s (RBA) decision to leave interest rates on hold for another month, especially with investors still confident that another rate cut is on the cards in the near future.
However, a stronger-than-expected rebound in the June Construction PMI helped to shore up the Australian Dollar. Rising from 46.7 to 53.2, the measure signalled a substantial recovery in the sector and suggested that the domestic economy was in a more robust shape than previously thought. As commodity prices were also boosted by a particularly dovish set of Federal Open Market Committee (FOMC) meeting minutes this helped the Australian Dollar to Euro (AUD EUR) exchange rate to recover some ground.
Confidence in the Euro (EUR) has been largely hampered this week, in spite of bouts of increased safe-haven demand. Worries over the risks of contagion from Brexit have continued to impact the mood towards the rest of the Union this week, particularly as domestic data has failed to offer much encouragement to investors. The single currency slumped sharply in response to the German Industrial Production figures for May, as output was found to have unexpectedly fallen on the year. This indicated that the Eurozone’s powerhouse economy was suffering a slowdown even before the result of the UK’s referendum was revealed, a discouraging prospect.
Ahead of the weekend German data continued to disappoint markets, with the latest trade balance data falling substantially short of expectations. In May the trade surplus narrowed from 25.7 billion to 21.0 billion Euros, in part the result of a sharp slump of -1.8% in exports. Naturally this exacerbated concerns over the long-term outlook of the German economy, and the wider Eurozone as a result. As Carsten Brzeski, economist with ING, noted:
‘Today’s trade data mark the end of a disappointing week for the German industry. All May data point to a sharp slowdown of the German industry.’
The continuing fallout of the Brexit vote is likely to keep the Euro on the back foot for the foreseeable future, particularly if exposed fault lines within the currency union deepen further. If worries over the Italian banking sector flare back up in the coming days this could put additional downside pressure on the common currency, particularly as major Eurozone ecostats will be limited at the start of the week.
Of importance for the Australian Dollar will be the latest Chinese Consumer Price Index report, which is forecast to show a slight weakening in domestic inflation. Signs of slowing in the world’s second largest economy are expected to prompt renewed risk aversion amongst investors, with commodity prices likely to return to a downtrend. A stronger showing, on the other hand, would allow the AUD EUR exchange rate to extend its recent gains on the back of market reassurance.
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