AUD steadies as all eyes turn to Europe
Tuesday 19 July, 2022
Daily Currency UpdateThe Australian dollar maintained a narrow handle through trade on Monday, edging marginally higher on the day as investors appear to square positions ahead of key risk events later this week. With little of note on the macroeconomic ticket the AUD bounced between 0.6790 and 0.6850, dragged higher on the heels of a broadly weaker USD and stronger Euro. The Euro remains front and centre this week and key in determining near term direction and risk sentiment. Our focus turns to three major risk events. Of greatest concern is the end of annual maintenance period on Russia Nord Steam 1 gas pipeline, a critical source of gas supplying Germany and Western Europe. Fears Russia will refuse to reconnect supply in retaliation to the Wests response to the Ukraine offensive have sent gas prices soaring in recent weeks and failure to reopen will all but guarantee the continent tips into recession. The Second item on the Agenda, the ECB policy meeting and thirdly Italian politics. With the AUD tied to Euro performance in recent months and the threat of global recession looming ever larger a test of supports below 0.67 could materialise should the Nord Stream 1 line remain closed, while an uneventful re-opening will quell near term demands, ease pressure on Gas prices and potentially propel the AUD higher.
Key MoversThe USD moved lower through trade on Monday, relinquishing ground for the 2nd consecutive session amid profit taking following the recent record uptick and a broader re-positioning ahead of three key European risk events. Our focus this week turns to the European Central Bank and expectations surrounding a critical shift in monetary policy. Policy makers have signaled a move away from negative interest rates and the beginning of a period of tighter monetary policy. With markets pricing in a rate hike, forward guidance and the pace of future hikes will be key in determining near term direction.
Italian political uncertainty also remains a concern for broader Euro direction. Draghi, the Italian PM, announced his intention to resign last week amid a collapse in coalition support, however reports the leading Five Star party is attempting to salvage a coalition agreement has helped ease pressure on Bond prices and added some support to the Euro. Draghi is set to announce whether he will abide by his resignation on Wednesday. Having indicated he will not stay on as PM without the support of MP’s and the parliament the next few days remain critical.
Finally, and perhaps of greatest concern is the end of schedules maintenance to the Nord Stream 1 gas pipeline. While annual maintenance is normal there is a growing fear Russia will refuse to re-open the pipeline in retaliation to the West’s response to Ukraine. Gazprom already diluted supply through the pipeline in June and a complete shutdown in supply will all but cripple the continent, in particular Germany. Germany relies on Russia and the Nord Stream 1 pipeline for approximately a third of its Gas reserves and with Gas prices near record highs an extended closure will all but guarantee Germany is thrust into recession, a consequence that will have ripple effect across the global economy and ensure near term inflation pressures extend into 2023.
- AUD/USD: 0.6730 - 0.6850 ▲
- AUD/EUR: 0.6680 - 0.6750 ▼
- GBP/AUD: 1.7380 - 1.7620 ▲
- AUD/NZD: 1.0980 - 1.1120 ▲
- AUD/CAD: 0.8780 - 0.8880 ▼