The relationship between AUD/EUR and equities is clearly positive, with the daily percentage correlation of the cross with the S&P 500 a decent 0.51 since end-May (compared to e.g. 0.2 for USD/JPY vs. SPX). “This highlights that even though the Eurozone remains the most likely source of global jitters in coming weeks, notably Spain’s ongoing turmoil and the troika, negotiations in Athens ahead of the 20 Aug bond redemption), higher beta AUD is likely to suffer more than EUR during broad risk off episodes.” they add. ECB president Draghi‟s commitment yesterday to take undisclosed steps to support the euro left AUD/EUR within recent ranges but if the ECB fails to meet high expectations on 2 Aug, equities and AUD/EUR could likely to fall.
“With the Eurozone likely to remain in recession well into 2013 in contrast to Australian GDP growth above 3%, most fundamentals point to historically strong AUD/EUR.” writes the team. One exception is the Eurozone’s balanced current account vs. Australia’s C/A deficit widening to - 5%/GDP in 2012, but as the RBA noted this week, this widening deficit is being funded comfortably by inflows to government bonds and equities.