EUR: Downside Risk Intact; AUD: Downside Remains Limited - Credit Agricole

*EUR: Downside risk intact. The EUR has been range-bound for most of the last week, mainly on the back of stable ECB rate expectations. As part of last week’s ECB press conference, central bank President Draghi kept all options regarding a more aggressive policy stance open. However, given stable medium- and long-term inflation expectations further policy easing appears unlikely anytime soon.

Nevertheless, a weakening trade and risk asset-related capital flow situation appears to keep the EUR subject to downside risk. This is for instance well reflected in underperforming EUR denominated risk assets such as equities. Elsewhere, it appears that weakening export growth in major euro nations such as Germany is confirming the above outlined notion.

Accordingly we remain in favour of selling EUR rallies, for instance against the AUD and the USD.

In terms of data, investors’ main focus will shift to this week’s Q2 GDP release.

AUD: Downside remains limited. The AUD has been under pressure, mainly due to rising risk aversion and falling RBA rate expectations.

Last week’s weaker than expected employment data has been increasing expectations of the central bank considering a more dovish monetary policy stance. Indeed, weakening labour market conditions should point to weakening price developments.

However, as the RBA already expected further rising unemployment, the most recent data is unlikely triggering a change in stance. It must be noted too that improving business activity rather points to increasing hiring activity up ahead.

Accordingly we expect investors’ RBA rate expectations to stabilize anew to the benefit of the AUD.

*CA maintains a short EUR/USD position from 1.3780 targeting 1.33.

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