Euro vs Aussie Looking Beyond the RBA

This evening’s Australia’s February jobs figures (due Thursday 0:30 GMT/London) are expected to show a 10K rise, following a similar print in January and a decline of 3.8K in December.  The three-month moving average of 9K is well below the 30K prevailing last summer. The unemployment rate is expected to edge up to 5.5% from 5.4%.

Despite the weakening dynamics in Aussie employment, markets are approaching the currency via the extent to which the Reserve Bank of Australia is near the end of its easing campaign, as opposed to the extent of new easing ahead. Other macro indicators show some resilience. The Westpac-Melbourne Institute Consumer Confidence Sentiment is at the highest since December 2010 and retail sales began showing signs of a bottoming.

Australian money markets have tempered their expectations for further RBA rate cuts, with only one 25-bp rate cut being priced in by year-end. This already has supported the Aussie as of late. And with the AUD/USD exchange rate well below the high profile 1.05-1.07 territory, the RBA may not show the same concern as three months ago. Some participants cite upcoming Chinese tightening as a case for a China slowdown. Not only the PBOC is unlikely to raise rates any time soon, but history has demonstrated that previous tightening from Beijing did not rail risk appetite nor the Aussie.

On the Eurozone front, the remaining question revolves around Italy’s election choice. Last month’s elections produced a hung parliament, with the center-left coalition led by the Democratic Party (PD) winning a majority in the lower house but failing to do so in the Senate. Despite a spike in the Italian borrowing costs right after the inconclusive election results, interest rates have declined markedly. The yield on 10-year Italian govt bonds fell to 4.6% from the 4.95% high attained in February 27. The ongoing stabilisation in Italian paper and the euro currency stems from lingering hope that a temporary government may be formed to ensure reform continuity. Whether such a government would avoid a second round of elections shall depend on the dynamics of power inside the PD.

There is a possibility that prolonged elections stalemate would force Italy to apply for the ECB’s Outright Monetary Transactions in order to cap any re-surging gains in bond yields. But in order for the OMT to be approved, Italy would have to abide by the required conditionality, which is the point of rupture in the elections. Until any conclusive outcome is obtained, EUR shall remain pressured. And the Aussie is potent candidate to cap the single currency.

EUR/AUD has broken its seven-month trendline support, eyeing its next target at the 200-DMA of 1.2420s. With the EUR/USD struggling to hold above its own 55-WMA of 1.2880, further weakness in EUR/USD is likely to broaden selling into other EUR crosses, including the Aussie. Watch for a weekly close below 1.2490, which would pave the path for next key target at 1.2170-80.