Updated: May 8, 2020
Since bottoming at the peak of the Covid-19 market sell-off on March 19th, AUD has been on an absolute rocketship.
In the last 35 days, AUD has ended the day lower just 9 times (assuming AUD closes today out higher as well.
Over this time period, AUDUSD has risen from lows of just above 0.55 to highs of just over 0.65 level (last week).
Powering the rally has been a few factors;
1) The Fed stepped in with huge rate cuts, QE and lending programmes and flooded the market with USD. This has given risk assets (like US equities) a BIG lift, while floods of USD helped alleviate the upside USD pressure.
2) Domestic Australian factors; the Covid-19 outbreak never really took a hold in Australia, as such they have been able to gradually reopen and should avoid a second wave outbreak (provided they don’t let in floods of infected foreigners, which I doubt they will). Meanwhile, China (Australia’s biggest trade partner is rapidly reopening for business, having been a few months ahead in terms of the outbreak than most of the rest of the world.
Point number 2 brings us onto why AUD has performed so strongly today; overnight data showed Australia’s trade surplus shot to a record high of $10.60bln in March, driven by a 15% increase in exports that month (in part thanks to an export recovery post-Cyclone Damien and due to the Chinese economy reopening in March).
Contributing further to AUD’s boost was China trade data; China posted a surprise Y/Y expansion of 3.5% Y/Y (exp was a -15.7% drop) in exports in April, meaning that its trade surplus was also much better than expected at $45.3bln.
Recovering trade with a recovering Chinese economy should continue to support AUD relative to many of its other, less China exposed, G10 peers.
At least, that is the narrative being pushed by some analysts. Others are much more skeptical of the AUD rally. The rally has closely followed that in US equities, and most analysts agree that at current levels, US equities seem overvalued/disconnected from the harsh economic reality (skyrocketing unemployment rates, plunging earnings expectations etc.).
But, for me, applying the logic that AUD and stocks are correlated and both higher and stocks are overvalued so AUD must be overvalued doesn't add up. As I mentioned earlier, AUD is also being supported by legitimate domestic factors such as 1) being hit less badly by Covid-19 and 2) being more highly exposed to recovering Chinese markets.
The resurgence of US/China trade tensions late last week (US officials ramping up the Covid-19 blame game and threatening China with tariffs and sanctions) does put the bullish AUD narrative to test though…
Any US tariffs or sanctions against China could hamstring AUD’s recovery.
The upcoming trade talks between high-level US and Chinese officials will be crucial for AUD in the near term.
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