The ECB and RBA are the two central banks which need the Fed to hike sooner, thus in turn weakening AUD/USD and EUR/USD. However last week we saw a massive re-pricing of Fed expectations, with Dec fed fund futures down 11bp to 66bp and this in turn pushed USD bulls away…recall the Feds median expectation is 100bp.
Both central banks are expected to ramp up exchange fighting language, however which of the two do we believe will actually act? The ECB will only act if inflation (in the April 30 CPI estimate) stays around 0.5% – the market and ECB expects a rebound at this print (although no Bloomberg estimate yet). If inflation rebounds I don’t think the ECB ease policy until EUR/USD rallies to 1.42-1.4500, with negative deposits first off the rank and QE (buying private assets) if EUR/USD manages to rally to 1.4500 even with negative deposits.
The RBA will increase its FX fighting rhetoric on moves above 94c, as the pair becomes ‘uncomfortably high’. Aussie CPI (trimmed mean) comes out next week and there is a good chance we see this pullback from a 0.9% pace in Q4 to 0.6-0.7% in Q1. The prospect of lower inflation and a strong AUD suggests the RBA will get more impact from jawboning than the ECB. A weaker inflation print won’t see them move from the neutral setting, but they would get more bang for buck from jawboning. Recall Glenn Stevens said the AUD/USD should be closer to 85c than 95c.
Either way, a closing break of the downtrend at 1.4810 would be the best way to play this, adding on a close above 1.4990.