Morning Commentary: The World in a Nutshell

Foreign Exchange - Morning Commentary
The World in a Nutshell
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Earlier this week, the Reserve Bank of Australia (RBA) maintained its cash rate and target yield on 3y AGBs at 0.25%.  Additionally, the RBA sounded more confident in the economic outlook with the bank signaling that things might not be as bad as initially feared. 

But shortly after the rate decision, the Australian state of Victoria announced a six week lockdown of Melbourne due to a spike in infections.  In essence, Australia encapsulated the state of the world in the span of just a few hours. 

Compared with its June statement, the RBA sounded more confident on its economic outlook.  In its most recent statement, the bank noted that conditions have stabilized and the “downturn has been less severe than earlier expected.” 

But concerns remain as evidenced by Melbourne locking down again for at least 6 weeks.  Daily new COVID-19 cases in Victoria have been rising much faster than other states since early June and hit nearly 200 cases on July 7th, the highest one day total since the pandemic began. 

This new shutdown impacts an area that accounts for ~20% of Australia’s GDP so the direct economic impact is material.  But the need for renewed lockdowns in Melbourne likely makes the government more cautious in easing restrictions in other parts of the country and re-opening international borders.  Further, the new lockdown should also hit consumer confidence.  When taken all together, the follow on effects are also sizable.    

Certainly the RBA will closely monitor developments/rising risks to the economy but should take some comfort from signs of green shoots in the greater economy.  This means that the RBA, like the rest of the world, is in a wait and see mode as the push/pull dynamic between infections and improving economic data continues. 
  • The US is ramping up testing in Louisiana, Texas and Florida as officials attempt to gain a better understanding of how the pandemic is evolving.  The governor of New Jersey mandated residents wear masks outside and Miami-Dade has paused its re-opening plans.  With the virus continuing to spread, the US set another record for infections and deaths at the same time that the Trump administration started the 1 year process of leaving the WHO. 
  • Some top aids in the White House have suggested that the US undermine the Hong Kong dollar peg to punish China for its crackdown in Hong Kong.  Notably USDHKD volatility and spot have not moved overnight and this makes sense.  Despite the sensational headlines, the chances of the US following through with this proposal is extremely small.  In theory the US could limit access to US dollar funding but that is impractical.  Such a move risks destabilizing USD dollar pegs around the world which includes many US allies.  Further this proposal faces strong opposition in the US administration as it will hurt the US and disproportionately impacts Hong Kong relative to Beijing.  On a broader level, Hong Kong has a strong record of defending its peg with foreign exchange reserves that are more than two times the amount of money in circulation.  Should additional funding be needed, China stands ready with further support.   
  • Mexican President AMLO kicks off a two-day meeting with President Trump today.  Canadian PM Trudeau was also invited to help mark the start of USMCA but declined the invitation. 
  • UK Chancellor Sunak addressed the UK Parliament today and outlined further stimulus measures.  Brexit talks are also ongoing with informal talks held during a dinner last night and negotiating teams meeting today.  Expect continued volatility around talks.
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