EUR/AUD Exogenous Analysis
- The EU and Australia Current Account to GDP differential
The current account to GDP shows the percentage of a country’s international trade that makes up the GDP. Countries with higher current account surplus have a higher current account to GDP ratio while those running deficits have a negative current account to GDP ratio.
In this case, if the GDP differential is positive, it means that the exchange rate for the EUR/AUD pair will increase. But if the differential is negative, then the exchange rate for the pair will drop.
In 2020, the current account to GDP ratio in the EU is expected to hit 3.4% and -1.5% in Australia. Thus, the current account to GDP differential is 4.9%. We assign a score of 3.
- The interest rate differential between the EU and Australia
Typically, investors put their money into financial instruments that offer higher interest rates. Therefore, the country with a higher interest rate should be expected to have more inflow of funds than that with a lower interest rate. Note that when foreign investors invest in the local economy, they have to convert their money into the domestic currency. This conversion increases the demand for the domestic currency in the forex market hence increasing its value.
In forex trading, if the EUR/AUD pair has a positive interest rate differential, it means that the exchange rate of the pair will increase. Conversely, a negative interest rate differential implies that the pair has a bearish outlook.
In 2020, the Reserve Bank of Australia cut the cash rate from 0.75% to 0.1%, while the ECB has maintained interest rates at 0%. Therefore, the interest rate differential for the EUR/AUD pair is -0.1%. We assign a score of -3.
- The EU and Australia Growth Rate differential
In any economy, the value of the domestic currency is mostly determined by the growth of the local economy. Therefore, a country whose economy is growing faster will see its domestic currency appreciate faster.
If the growth rate differential is negative for the EUR/AUD pair, we can expect a bearish outlook. If it is positive, it implies that the exchange rate for the pair will rise.
For the first three quarters of 2020, the Australian economy contracted by 4% and the EU economy by 2.9%. The GDP growth differential is 1.1%. We assign a score of 2.
Conclusion
The EUR/AUD exogenous factors have a score of 2. If the conditions observed in the exogenous factors persist, we can expect that the pair will adopt a bullish trend in the short-term.
The technical analysis of the EUR/AUD shows the weekly price chart bouncing off the oversold region of the lower Bollinger bands. More so, the pair is still trading above the 200-period MA. All the best.
