In response to disappointing data out of China over the weekend, market sentiment dampened considerably. This weighed heavily on demand for high-yielding assets such as the ‘Aussie’ (AUD).
Over the past few weeks the Australian Dollar has made robust gains versus most of its major peers. This was due to a combination of cooling bets regarding Federal Reserve rate hikes and extensive stimulus measures employed by the People’s Bank of China (PBoC).
However, Monday has seen a reversal for AUD after data out of China exaggerated fears regarding a global economic slowdown. Both Industrial Production and Retail Sales failed to meet with the respective market consensuses.
Some analysts believe that the AUD rally was the result of tracking gains in iron ore prices, expecting the rally to fade as base metal prices resume depreciation. ‘This is a smoke and mirrors rally’ in the Australian dollar, said Annette Beacher, head of Asia-Pacific research at TD Securities in Singapore. ‘The Aussie is merely following iron ore, and the underlying fundamentals have not changed. The short-squeeze in iron ore will fade, and then so will the Aussie.’
The Australian Dollar to Euro (AUD/EUR) exchange rate was trending in the region of 0.6754 during Monday’s European session.
Although the single currency is holding gains versus the Australian Dollar, the Euro is still holding losses versus most of its major peers. The depreciation can be linked to US Dollar strength thanks to safe-haven demand.
The European Central Bank’s (ECB) extensive stimulus measures introduced last week continue to weigh on demand for the common asset, as was the intention. In particular, the expansion of asset purchases is projected to have a long-term detrimental impact on the value of the Euro.
Domestic data printed positively during Monday’s European session but the result had minimal impact on the shared currency. January’s Eurozone Industrial Production was predicted to advance by 1.6% annually and 1.7% on the month, but the results actually grew by 2.8% and 2.1% respectively.
In response to the industrial output data, Howard Archer, chief European and UK economist at IHS Global Insight warned that output gains could be temporary, stating; ‘It needs to be borne in mind that output can be highly volatile from month to month. Consequently, there is a very real possibility that February will see a marked relapse.’
During Monday’s European session, the Australian Dollar to Euro (AUD/EUR) exchange rate dropped to a low of 0.6746.
The AUD/EUR exchange rate is likely to see volatility during the Australasian session in response to the publication of meeting minutes from the Reserve Bank of Australia (RBA). The minutes are expected to be dovish in tone given repeated calls for AUD devaluation and attempted jawboning of late.
During Tuesday’s European session, fourth-quarter Eurozone Employment data has the potential to cause AUD/EUR volatility.
The Australian Dollar to Euro (AUD/EUR) exchange rate climbed to a high of 0.6800 during Monday’s European session.
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