AUD Still Rising, but Tensions With China Lurk
Risk assets (like global equities and crude oil markets) capped off another week of gains with a bang last Friday after US jobs data SMASHED expectations with a 2.5mln gain in employment vs forecasts of an 8mln decline.
All this risk on has seen AUDUSD rise to levels not seen since the first week of January (around 0.7000).
Yes the first week of January, just before the US and China were about to sign their Phase 1 trade deal and Covid-19 was still a Chinese secret.
With AUDUSD at these levels, one might be tempted to ask, from a global risk appetite perspective, are things better now than they were back in early January?
The Covid-19 has wreaked havoc on the global economy since late January and US/China tensions are back on the rise.
Moreover, in recent weeks, China has escalated tensions with Australia, increasing barriers to Australian exports of Barley and Meat. Moreover, over the weekend, China began advising its tourists not to travel to Australia due to “racism” towards Asians in the country.
Put simply, China is angry at Australia over its continued push for an independent inquiry into the origin of Covid-19, an inquiry that would likely confirm to the world what many already suspect; a botched cover-up attempt and the corruption and incompetence of the Chinese Communist Party.
So how is this rally in AUDUSD justified?
It's not, if you look at it from an AUD perspective.
But it is, when you look at things from a USD perspective.
Let’s compare USD fundamentals now with the start of January; in January, the US economy was outperforming most of its developed market counterparts in terms of growth and the federal funds rate was at 1.5-1.75%.
Now, US GDP is expected by some to drop by as much as 40% in Q2 2020, a MUCH greater rate of decline than that expected in Australia and other developed economies.
Moreover, right now, the Federal funds rate is only slightly above 0% (below the RBA’s 0.25%) and the Fed is out printing pretty much every single major global central bank in the world combined.
In other words, when you look at AUDUSD’s rise as a function of the dollar’s greater decline, things make much more sense!
If USD is to continue its downtrend over summer, expect AUDUSD to continue its grind higher, regardless of Australia, Chinese risks.
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