• Joel

Here's why AUD is at levels not seen since early 2019

Here's why AUD is at levels not seen since early 2019

AUD is at levels not seen since early 2019, a time when the global economy was entering its 10th year of healthy post-Global financial crisis growth and the only thing markets had to worry about was bickering  between the US and China and the Covid-19 virus was either contained within the animal population or in the imagination of some biological weapon engineer.

Clearly the predicament the global economy now finds itself in is much, much worse position. So how then can a risk-sensitive currency such as AUD be performing so much better than it was at the start of 2020, so much so that it is now even testing the best levels seen in 2019?

1) Australian economic outperformance

Prior to the Covid-19 outbreak, the US GDP was growing at an impressive annual rate of above 2.0%. Not quite as fast as the Australian economy, whose GDP was rising at an annual rate closer to 3%, but still decent, and faster than most other developed countries across the globe.

Now the situation is much different; i.e. the US economy is no longer outperforming that of most of the rest of the world, given the fact that compared to other developed nations, the US has endured a worse Covid-19 outbreak. Meanwhile, over in Australia (aside from the worsening outbreak in Victoria), the pandemic has been contained well, leading to a much more manageable economic hit.

Further supporting the Australian economy is an unusually high demand for the country’s natural resources from its most important trade partner, China. China went into lockdown and suffered badly due to the Covid-19 outbreak in January, but lifted restrictions in March and since then its economy has come roaring back, pumped up by huge government stimulus measures and infrastructure investment. That means lots of demand for Australian materials – basically, Australia has been able to export its way out of the economic crisis.

All of this means that the Australian economy stands in much better stead compared to most of its developed market peers than its has in quite some time – an AUD positive.

2) Risk on

Since the February-March Covid-19 panic, which saw risk assets around the world (stocks, risk FX, commodities) all slammed as investors flooded to the safety of USD, markets have been, in general, VERY risk on.

The list of reasons why is very large, but to name the most important; 1) the rapid, aggressive response of global fiscal and monetary policymakers in easing economic conditions and providing liquidity to financial markets, 2) a better than expected rebound in May (as indicated by data) in key economies following March, April lockdowns after key markets, leading to greater expectations for a V-shaped recovery, 3) faster than expected progress on vaccines and discovery of Covid-19 treatments that looks to have substantially lowered the virus’s death rate.

All of this risk on has managed to lift global equities back within reach of all-time highs (when you look at bourses such as the S&P 500 and DAX anyway) and has brought risk FX, like AUD, and commodities higher with it.

3) Gold

One of Australia’s biggest exports is gold. The country exported 341 tonnes of the stuff in 2018 for a total value of above $14bln (USD). The government forecasts that exports of the stuff will rise to 418 tonnes in 2020-21 from 362 tonnes in 2019-20, with revenue jumping to AUD $32 billion from AUD $27 billion.

Due to Gold being such an important component of Australian exports (around 6% of total exports last year), AUD has a correlation with the precious metal.

Gold today flew to fresh highs not seen since early 2011, with familiar themes such as growing expectations for more monetary stimulus from the Fed and a weaker USD helping pump the precious metal, which in recent weeks has appeared to have a closer correlation with risk assets (and is benefitting from risk on flows today).

Many analysts continue to forecast higher gold prices in the coming months; should this be the case, expect AUD to remain supported. 



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