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AUD Outperformance as Biden Clinches Presidency

Updated: Nov 9, 2020



Ok, first up, we are not 100% on Biden clinching the Presidency. He is in the lead and set to win enough electoral college votes to hit the 270 mark needed to win, but team Trump is not going to leave without a fight; they are claiming fraud/voter irregularities etc. Things are going to end up in the courts. There will likely be ballot recounts. Things could get messy. But betting markets are pretty solidly sure that Biden has got this thing wrapped up.


As a result, we have seen an emphatic move in the market this week; stocks have soured and US bonds have soured, the latter boosted by the Republicans looking to have hung on to their majority in the Senate, which means no big spending from Biden in his first two years, at minimum.


FX markets have seen equally emphatic moves, though this is being driven mostly by expectations of a big change in US foreign policy dynamics, rather than domestic economic factors; USD has been slammed on the idea that Biden is set to take a softer tone with major US trade partners such as China and the EU regarding trade policy.


That ought to translate into a healthier global trade environment and better global economic growth, something which is typically not a good thing for safe haven global reserve currency USD.


In terms of which G10 currency this unfolding scenario is best for in the G10… you guessed it… AUD!!


If it’s good for China is good for AUD


There has been some focus today on the souring trade relationship between China and Australia. Over the past few months, China has hit Australia with tariffs on some of its agricultural goods. This morning, the FT reported that officials at an Australian business meeting advised participants that bilateral relations with China were unlikely to recover in the short-term and they should begin exploring alternative options (whatever that means).




There has been some focus today on the souring trade relationship between China and Australia. Over the past few months, China has hit Australia with tariffs on some of its agricultural goods. This morning, the FT reported that officials at an Australian business meeting advised participants that bilateral relations with China were unlikely to recover in the short-term and they should begin exploring alternative options (whatever that means).


But I wouldn’t get too sensationalist about this; China needs Australia. And Australia needs China. China is rapidly growing and needs access to the cheapest Iron, coal and other minerals that it can possibly get its hands on. The best place to satiate much of this demand is from Australia. Fully one third of all Australian exports go China, so they need the Chinese even more. China would be shooting itself in the foot if it banned imports from Australia, while Australia would be shooting itself in the head if it did anything to end its trade relationship with China.


Now we have established that Australia and China are likely to remain highly important trade partners over the coming future, let’s talk about the relationship of AUD to the Chinese economy.


Given that Australia is so dependent on sending its exports to China, the health of the Australian economy is closely linked to the Chinese economy. Example of the strength of this relationship; prior to this year’s lockdown due to Covid-19, Australia had not seen a recession for decades, as the island benefitted from ridiculously fast levels of economic growth in China. Not even during the global financial crisis of 08/09 did the Australian economy shrink. Not a claim any other developed market economies can make!


Thus, AUD does well when China (and CNH) does well, and vice versa.


Indeed, China’s fast recovery post Covid-19 this year led to a faster than expected recovery in the Australian economy which directly fed into AUD strength over the last few months.


Turning to recent events; with Biden now set to take the helm in the US, relations with China are expected to improve. This ought to lead to stronger Chinese growth over the next four years and global trade picks up. AUD of course is set to be the biggest beneficiary of this out of the G10 currencies, alongside maybe also NOK, hence why we have seen such strong gains in AUD this week (it is up over 3% vs USD from the start of the week, with AUDUSD in the 0.7200s from the low 0.7000s). 

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