The Euro vs Australian dollar

[John From Moneycorp]

Monthly review is below.

 

Things looked up for the euro in July, after investors fell in with the idea that Greece's prime minister was serious in his intention to obey the demands of the nation's creditors. The pointless referendum was forgotten and the focus switched to the preparatory work towards negotiations on a third bailout. Greece received a bridging loan from the EC which was promptly handed back to the European Central Bank in settlement of its maturing loan to the country.

 

The referendum bluff was not without cost though. Greece's banks remained closed for three weeks and the Athens stock market for five. Bank share prices fell sharply when the stock exchange reopened. Greek manufacturers suffered a serious slowdown. Nevertheless, the bailout negotiations are said to be progressing towards an agreement in early August. Finland believes a fresh bailout will be ineffective and Germany is not keen to take part but those niggles are not of great concern to investors, for whom any agreement is better than none.

 

The Australian dollar spent July on the defensive. Its problems were the same ones that had dogged it since March; falling commodity prices, slowing growth in China and the fear that the Reserve Bank of Australia might take interest rates even lower. The RBA governor fed that last concern, saying a couple of times in July that further rate cuts were "still on the table" in monetary policy discussions.

 

That all changed in early August (well, not all; commodity prices remained soft). When the RBA announced that it was keeping its benchmark interest rate steady at 2% the statement did not include the usual tirade about the Aussie being overvalued. The omission astonished investors and they took the dollar higher. They took it higher again two days later when the RBA issued another statement, this time about monetary policy. Not only was the central bank surprisingly upbeat about the economy, it banished any idea of another interest rate cut. The Aussie rallied again.

 

The net result is that over the last month, and largely by accident, the euro and the Australian dollar are unchanged against one another, having covered a six-cent range along the way. Both are about 1.6% weaker against sterling and 1% weaker against the US dollar.

 

Where their relationship goes next is anyone's guess. The ECB's money-printing stimulus, which will run at €60bn a month until next September, ought to weigh on the euro if only because it dilutes the value of existing money. But low prices and low demand for Australia's mineral exports will mean low demand for the Australian dollar too.