AUD strength showing against EUR
One of the largest risks this year is of further credit-related issues. It is this factor that will likely see the NZD/USD revisit 65c in the next few months.
However we are also amidst a large mining boom in Australia, in turn the result of strong emerging economy growth – as discussed by the RBA last week [speech]. Of particular interest is the RBA’s expectation of higher terms of trade to come for Australia [given earlier in the month]. This would normally mean an upward bias to the Australian dollar.
History suggests that the risk cycle will win out in the short-term (i.e. over days/weeks) but, short of the major reversal in China, that the mining boom will probably dictate the AUD trend over the next 2-3 years.
One of the ways that these mixed influences have manifested recently is to push the AUD/EUR towards highs even while the AUD/USD has been slipping lower.
A similar pattern is noticeable with the NZD. The NZD/EUR does swing with shifts in the USD but the medium-term drift is upward (due largely to the AUD influence). Looking forward, the expected USD rally will likely see the NZD/EUR lower in the next few months but new highs for this cross-rate are still probable later this year.
