LONDON: Recession and the prospect of further interest rate cuts arguably make the euro a sell. But what to sell it against. The Australian dollar could be the answer. The euro has made sizeable gains against the Aussie lately, firming to A$1.2886 last Thursday from A$1.2213 on April 3.
It traded back up to A$1.2889 on Tuesday after Australia's central bank cut its key rate by 25 basis points to a record low 2.75 percent. But that rise may be short-lived.
Even after the latest move, Australia's 2.75 percent benchmark rate is a lot more attractive than the European Central Bank's main rate, which was cut to 0.5 percent last Thursday, with the prospect of more to come.
Having said on Thursday that the ECB was "technically ready" to cut its deposit rate into negative territory if needed to boost the economy, ECB President Mario Draghi reiterated the message on Monday. "We stand ready to act again," he said, departing from a prepared speech.
After its own cut, the Reserve Bank of Australia said it had "previously noted that the inflation outlook would afford scope to ease further, should that be necessary to support demand. At today's meeting the Board decided to use some of that scope."
The implication of "some" is that the RBA has more scope to cut if necessary but, arguably, the tone of the statement does not suggest the central bank feels a pressing need to do so.
"There has been a strengthening in consumption and a modest firming in dwelling investment, and prospects are for some increase in business investment outside the resources sector over the next year," the RBA stated.
That does not sound like a central bank champing at the bit to cut rates again immediately. There is also the fact that while the ECB is acting against a backdrop of euro zone economic fragility, Australia's central bank is forging policy in a more benign situation, in which, for example, unemployment "remains relatively low".
In this light, perhaps the euro has some room to depreciate against the Australian dollar in the next month with the 100-day moving average at A$1.2671 an initial target and A$1.2550, the 50 percent retracement of the April-May rally, behind that.
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