Despite strengthening on the back of the latest Australian employment report the AUD EUR exchange rate remains vulnerable to downside pressure from a raft of Chinese economic data.
Confidence in the commodity-correlated ‘Aussie’ (AUD) weakened on Wednesday in response to an unexpectedly severe contraction in Chinese imports. Investors were concerned to see that demand had weakened in the world’s second largest economy, prompting base metal prices to slide sharply. Worries over the robustness of the Chinese economy equally dragged on the appeal of the Australian Dollar, with the higher-risk currency particularly exposed to any renewed slowdown in China.
Some of the Australian Dollar to Euro (AUD EUR) exchange rate’s losses were muted later in the day, however, as the latest Eurozone data also proved disappointing. Industrial Production was found to have slowed further than forecast in May; a worrying sign given the political uncertainty and market turmoil that has gripped the region in more recent months. With the currency union under increased pressure since the UK’s vote to leave the EU, this weaker showing prompted investors to sell out of the Euro (EUR) once again.
Although the Australian Unemployment Rate did tick higher as expected in June, from 5.7% to 5.8%, this failed to particularly weigh on the antipodean currency. The increase was largely due to an increase in the number of full time roles, which in itself would seem to suggest more robust domestic conditions. Altogether the picture appeared to be more positive than not, as researchers at BBH noted:
‘The Australian dollar is second only to Sterling today. It was helped by a sharp jump in full-time employment (38.4k), which is the strongest since last November. This, coupled with the tick up in consumer inflation expectations, keeps investors from anticipating a near-term RBA cut.’
Risk appetite was also generally shored up on Thursday, thanks to the decreasing odds of the Federal Reserve opting to raise interest rates in the near future. Although Philadelphia Fed President Patrick Harker was of the opinion that two rate hikes would be appropriate before the end of the year, this hawkish commentary was nullified by the fact that Harker does not currently hold a vote on policy.
Worries over the future of the currency union continued to drag on the Euro, meanwhile, with little in the way of significant domestic data to distract investors. Slight upticks in Finish and Irish inflation failed to galvanise any increased support for the common currency, allowing the AUD EUR exchange rate to extend its gains.
The latest raft of Chinese ecostats will be of particular importance for the ‘Aussie’ ahead of the weekend, with further signs of weakness unlikely to be ignored by markets. Forecasts suggest that second quarter GDP slowed marginally from 6.7% to 6.6%, a result which is expected to prompt an increase in market risk aversion. If the data proves more bullish, however, the AUD EUR exchange rate could remain on a stronger footing.
US data will also be in the spotlight, with Advance Retail Sales and Consumer Price Index readings expected to prompt further volatility. Robust figures could push the Euro lower against rivals, thanks to its negative correlation with the US Dollar (USD). Even so, any US Dollar strength could also weigh heavily on the ‘Aussie’.
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