Morning Commentary: Going From Strength to Strength

A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.

Going From Strength to Strength Share this story: Andrew Kositkun Foreign Exchange Head Trader

The Australian dollar (AUD) finished 2020 as one of the G10’s top-performing currencies and is continuing its run of strength in 2021. While a material part of the AUD’s overall 2020 performance can be attributed to its high correlation to U.S. equities, more recent performance can be tied to Australia’s economic rebound aided by a reopening of the economy after flattening the COVID-19 curve. On this dimension, Australia, with the exception of New Zealand, finds itself in a unique position as a Southern Hemisphere country (currently in its summer months), with relative COVID-19 outperformance that should allow a cleaner path toward economic performance.  Specifically on economic performance, the sharp move higher in the Australian data surprise index in November and December raises the possibility that the Reserve Bank of Australia (RBA) could upgrade its macro forecasts at its Feb. 2 meeting. At its Dec. 1 meeting, the RBA stated that it didn’t expect to raise its cash rate for at least three years. However, the unemployment rate was around 6.8% in November versus the bank’s projection for unemployment to be 8.0% and 7.5% in December 2020 and January 2021, respectively. As a result, markets have started to challenge the RBA on its rates narrative by pricing in roughly 0.3% worth of hikes over the next three years. Should economic activity continue to improve, this trend of pricing in rate hikes should continue.  Finally there is the issue of Australia–China tensions. The fourth quarter of 2020 saw material escalation in political tensions between the two countries that led to bans on some Australian agricultural products and restrictions on coal exports. Nothing suggests that there will be a reduction in tensions, but at the same time, it appears unlikely that trade tensions will spill over to iron ore exports. While much has been written about Australia’s dependence on Chinese iron ore demand, the lack of viable supplier alternatives also makes China dependent on Australian iron ore supply. As long as Australian iron ore exports stay above the trade tension fray, this persistent source of uncertainty should have limited impact.  HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT: Congress has certified Joe Biden’s victory, with President Trump promising an orderly transition but still disputing the election results. U.S. equities have opened higher as investors focus on the likelihood of additional stimulus and a more conventional Biden presidency.  According to the Associated Press, Democrats have won control of the Senate by sweeping both Senate races in Georgia. Additional stimulus is expected. While the exact amount remains to be determined, at a minimum, there should be an infrastructure of at least $1 trillion.  U.S. initial jobless claims beat expectations by coming in at 787,000 versus expectations for 800,000 claims. Continuing claims also beat expectations, as they fell to 5.07 million from a revised 5.2 million. Tomorrow brings the government’s jobs report. Prior to yesterday’s ADP jobs number, nonfarm consensus was 73,000. Since then, consensus has dropped to 50,000, with the whisper number possibly moving into negative territory.  Health officials in the U.K. report that the country has run out of ICU beds, with some measures showing 1 in 30 people in London infected with COVID-19. The country has moved into its third national lockdown, with first-quarter GDP growth expected to turn negative.  Japanese Prime Minister Yoshihide Suga has declared a state of emergency for the Tokyo region. This order is expected to last one month, but the head of the government’s advisory panel admitted “stronger measures might be needed.”  Japanese officials also met due to growing concerns around yen strength. With inflation expectations low in Japan, the country’s real yield advantage and trend U.S. dollar weakness biases the yen to appreciation. However like European Central Bank officials, Bank of Japan officials will likely be limited to jawboning in the near term.  Australia posted strong trade data, with exports and imports rising 3% and 10% month over month against expectations for a 2% contraction and 3% growth, respectively.

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