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The US Dollar has been the main beneficiary of safe-haven flows this week as geopolitical tensions in Europe continue to escalate. The ongoing war in Ukraine and the resurgence of COVID-19 cases in China have made investors jittery, prompting them to seek refuge in the greenback.
This has put sustained downward pressure on riskier currencies like the Australian Dollar, which is highly leveraged to the Chinese economy. The UK Pound has also come under pressure as Brexit negotiations hit another snag. With no end in sight to these tensions, the safe haven flows are expected to continue next week, putting further downward pressure on riskier currencies.
AUD - USD
The AUD-USD pairing is currently trading between the 0.7064 - 0.7070 range. Compared to the last month the AUD is down 5.20% and the last time it was this law was in late January. This means that all the ground that the AUD gained since February has been lost.
Although last week, the AUD did try to fight back against the greenback and rose by 2.35% after the FED raised the interest rate by 50 basis points instead of the anticipated 75 basis points. This fueled a buying frenzy in the equity and commodity markets. The investors switched to risk on approach after the FED chair declared that they have no intention to raise the rates further any time soon.
AUD became the largest beneficiary of this development in the currency market, as investors flocked to buy the risk-sensitive currencies. However, this rally of AUD was short-lived as the virus situation in China started to deteriorate, leading to lockdowns and a sharp sell-off in Chinese equities coupled with the worsening situation in Ukraine.
This risk aversion quickly spread to other markets as well, leading to a broad-based sell-off that saw the AUD lose 2.83% of its value as the week closed. The AUD - USD pairing is currently at its lowest since January and this trend is expected to continue in the short term.
The current bearish trend that started at the beginning of April is likely to continue for the time being. As we have stated time and again, it is being fueled by the political and economic uncertainty caused by the situation in Ukraine.
Fundamentally the AUD is stable and the meeting minutes of RBA released last week reaffirmed that all of the vitals of the AUD are in good condition as soon as the political uncertainty reduces and the Chinese economy sees a turnaround, the AUD can be a front runner against the USD.
However, for the time being, the markets are being ruled by uncertainty and the slowing Chinese economy is holding back the AUD. The current investor sentiment is a strong sell for the AUD-USD for the next week.
AUD - GBP
The AUD-GBP is currently trading between the 0.5717 - 0.5732 range, it has gained almost 1.34% in value against the GBP in one week. The AUD seems to have broken the sustained bearish pattern against the GBP that it was in since the starting of April.
The main reason for this uptick in the value of AUD against GBP can be attributed to the Bank of England's decision to increase interest rate by 25 basis points. While this move was expected by the market, no one was expecting it to be this big.
In a statement the Bank of England stated that the global inflationary pressures due to a number of factors have created a material deterioration in the outlook of the world and UK growth rate. The inflation rate in UK is said to top 10% this year, which is putting a lot of downward pressure on the GBP.
The relationship of AUD to GBP is directly linked with the performance of both of these currencies relative to USD. Since the GBP is under a lot of inflationary pressure due to the slowing UK economy and external factors, it is likely that the GBP will weaken against the USD in the short to medium term.
The AUD on the other hand is fundamentally stable against the USD with a stable economy, comparatively lower inflation rates and tightly managed employment levels. According to the Commonwealth Bank of Australia, based on these factors the AUD is expected to outperform the GBP in the coming weeks and months.
The investor sentiment is to buy the AUD against the GBP for the next week.
AUD - NZD
The AUD-NZD is currently trading between the 1.1013 - 1.1038 range and has gained almost 0.58% in value against NZD in the past week. The AUD started the week on a high note against the NZD and continued its bullish rally.
The main driving force behind the AUD bullish trend over NZD is the current hawkish bias of RBA. Headline inflation levels have been higher than expected and this has fueled market anticipation that the RBA may push for another interest rate hike in June.
Positive retail sales data for March further strengthened the AUD against the very competitive NZD. Technical analysis of this pairing indicates that the current bullish trend is expected to continue for the time being, the pair can even knock on the 1.12 level.
The investor sentiment is to buy the AUD against the NZD for the next week.
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