Euro weakens heavily amidst enthusiastic ratings agencies.
• Can I pay in Euros?
• AUDUSD recovers like our cricketers.
• RBA’s November rate hike deemed “mildly restrictive”.
Can I pay in Euros, (or Pounds for that matter)? Over the last week the Euro has been under further pressure as the ratings agencies have flaunted their post 2008 conservatism by treating any Eurozone sovereign debt indiscretion with a downgraded credit rating. Economic data this week has provided little new information on the region however ratings agencies have been quick to downgrade debt at every opportunity. The precursor for the gains in the AUDEUR cross was an announcement that the funds available in existing rescue packages are not sufficient to support a significant economic collapse. At the heart of the issue is that weak economies in the Eurozone don’t have the luxury of significantly reducing interbank interest rates (1%) or their currencies while also having little ability for fiscal stimulus due to austerity measures. All three of these tools are utilised by governments elsewhere to stimulate their economies, even still with contentious results. This week, the severity of the Eurozone announcement has ensured that the AUDGBP has also reached record highs.
After reaching parity last week, the AUDUSD fell faster than Australian wickets at the Adelaide oval. The Australian dollar had reached parity due to the US Federal Reserve reaffirming that it would maintain low interest rates for “an extended period”, however the local unit was unable to sustain the gains without positive news during Friday’s local session. The Aussie was fast to inspire a comeback from Monday this week however, similar to that apparent at the WACA. This was established by a surprise announcement in China that they would provide financial resources to support weaker European economies.
The RBA Meeting Minutes for December announced that the current monetary policy was “mildly restrictive”. After a shock rate hike in November, the central bank seems to be pouring cold water on its previously hawkish commentary by saying that, due to Australian households reducing their spending we can now sustain further mining investment without causing “inflationary pressures to build”. The current RBA interbank rate (4.75%), is in line with previous sentiment from Governor Stevens that the RBA would rather be slightly overzealous to over-inflation than reactionary to asset bubbles. Despite the resulting softer growth prospects locally, the AUD has rallied significantly this week due to firmer US-led risk appetite and Eurozone contagion.
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