Morning Commentary: Head of the Class: Timing Matters

Foreign Exchange - Morning Commentary
Head of the Class: Timing Matters
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Australia’s jobs report surprised to the upside last night as the country added 5.9k jobs against expectations for a -30.0k loss.  When looking at these numbers, it is important to remember the timing of the report.  The reference period for this report was the first two weeks of March with the country implementing shutdowns beginning March 23.  As a result, the expectations remain for April’s report to show a steep fall in employment and a spike up in the underutilization rate to capture the drop in hours worked.

Nevertheless, since the middle of March, the Aussie dollar has been the clear top G10 performer against the USD.  In deciding whether this outperformance can continue, it is helpful to break down the key drivers of the currency. 

Commodity Prices

On a relative basis, both iron ore and coal prices have held up relatively well versus other areas of the commodity space.  While commodity prices tend to be seen as a long term anchor rather than a short term factor that drives dislocations from fair value, it does provide a basis of support.  Moreover, signs that China is stepping up policy support should limit the downside for commodity prices moving forward. 

Unconventional Policy Support

When measured as a percentage of GDP, economic support out of Australia ranks as one of the most forceful responses.  However, the RBA’s move into unconventional policies has been relatively conservative compared to the “whatever it takes” approach of other central banks.  Case in point, the RBA has already begun tapering its purchases of government bonds as market conditions have improved.  This light touch approach, relative to other central banks, favors AUD appreciation, all else equal. 

COVID-19 Performance

Across a broad range of statistics—infection rates, testing rates, mortality rate etc.—Australia’s COVID-19 experience compares favorably against most countries and favors earlier normalization of economic activity.      

Risk Markets

Risk markets have been rallying with AUD performing true to its risk on/risk off characteristics.  However, unlike the other factors discussed, the global risk rally lacks the same level of stability, making it a key downside risk to AUDUSD. 

Near term, commodity prices, relatively favorable COVID-19 performance, and the RBA’s light touch should continue to be a mild positive for AUDUSD.  Longer term, the picture still remains unclear.  Household debt remains high and impact on consumer behavior from the first recession in 28 years remains to be seen. 
  • US initial jobless claims technically beat expectations as 5.2 million claims were filed against expectations for a 5.5 million print.  In reality, this provides nothing more than cold comfort as the US printed another massive number.  Over the past 4 weeks, the US has lost over 22 million jobs, eliminating all of the job gains since the last recession. 
  • President Trump is expected to unveil plans to ease lockdown rules today.  Yesterday, the President declared that the US has passed the peak of new COVID-19 cases however, medical experts are not all in line with this stance.  
  • The next wave of emergency relief funds continues to hit roadblocks despite continued talks.  The White House is set to hold talks with Congressional lawmakers today.  Urgency on additional relief stems from many factors including the ~$350 billion program to support small businesses expected to run out of funds soon.
  • Japan declared a nationwide state of emergency overnight.  Previously, it declared a state of emergency in seven prefectures.  Spain reported ~5k new cases, Germany reported its first rise in infections in a week and the UK is expected to announce the extension of its lockdown by three weeks today. 
  • The IMF has set up a facility to allow countries in need of balance of payment support to draw up to 145% of their IMF quota.  It has been estimated that investors have pulled $62 billion out of emerging markets last quarter, twice the amount withdrawn during the financial crisis.  
  • South Korea, in the first election held since the COVID-19 crisis started, delivered an outright majority for the incumbent Democratic Party.  This election result likely represents approval for how the government has handled the COVID-19 crisis. 
  • The Bank of Canada held rates unchanged but expanded its QE program.  Asset purchases will now include provincial debt and high grade corporate debt.  Additionally, the BoC has boosted its purchase of government debt.
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