Market Overview

11 May 2020

The Australian Continent Is a Pioneer in Post-Pandemic Recovery

The Australian Dollar stands out against many other currencies due to the fact that AUD/USD won back 100% of the damage it has suffered since the beginning of March. Unlike the single European currency or the Swiss Franc, the Aussie tested its April peak resistance levels again and again last Friday and Monday morning. The Australian currency has been in a fairly obvious uptrend over the past six weeks also against the Japanese Yen, which is something analysts can't say about the USD/JPY pair, for example.

The reason for such confident behaviour of the Australian "hero" could lie in the relatively limited involvement of a remote continent in the global pandemic. The local economy was hit painfully at the very first stage of the spread of the infectious focus in China, which took place since the second half of January as China accounts for a quarter of all Australian exports, and 60% of Australian shipments to China are made up of iron ore. Japan and South Korea are also among the top three export markets for Australia, but it seems that the main industrial and financial losses of these Asian countries due to the suspension of production are already left behind.

The country is still highly dependent on the pace of the opening up of the US economy, as well as India, as they are major trade partners. The rapid localisation of the virus in Asia is crucial for the Australian economy. A further fall of global economy is expected in the second quarter of 2020, but "the Australian economy is expected to record a contraction... of around 10 per cent over the first half of 2020; total hours worked are expected to decline by around 20 per cent and the unemployment rate is forecast to rise to around 10 per cent in the June quarter," the Reserve Bank of Australia (RBA) said in a statement on May 7. This is much less than the 14.7% unemployment level recorded this Friday in the United States, not to mention 22.8% of the so-called U6 unemployment rate which includes all persons marginally attached to the labour force, plus part time employment.

Meanwhile, the RBA expects a slow decline of unemployment in Australia reaching a 8.5% rate in the first half of the next year, a 6.5% unemployment rate till June 2022 and the final gross domestic product (GDP) fall of around -6% by the end of 2020 in its baseline "gradual recovery" scenario. According to this scenario, RBA forecasts almost the same +6% GDP growth in 2021, and +5% more of GDP in 2022 (see Fig 1). That is the most optimistic domestic forecast for today among all developed countries.

Fig 1. Australian Unemployment and GDP forecasts for 2020-2022

Source: RBA Economic outlook

The important role is played by a very compressed spread of infection across the territory of Australia itself: it has just 6,948 coronavirus cases detected altogether since March, including 97 fatalities. The daily number of new infections exceeded 25 cases only once in the past three weeks, and almost all of these cases are so-called asymptomatic, that is, they are carriers of the virus, but not sick people.

As a natural consequence of this dynamic, not only industrial enterprises, but also restaurants, cafes, and all forms of the service sector have been allowed to work since May 15 in the New South Wales state. The allowance was officially announced on Sunday despite the fact that New South Wales has been worst hit by the virus in the country with about 45% of the country's confirmed cases and deaths. The largest state in Australia with its capital in Sydney has a population of 7.5 million people or more than 30% of the total population of Australia. The state is reached by most important deposits of mineral resources, including black coal, silver, lead, and zinc diggings, famous Cobar copper mining, tin material and sands with rutile, used for titanium production. It remains a major coal producer from open-pit, or open-cut, mines in the country and, economically, New South Wales is the most important state in Australia with about one-third of the country's sheep, one-fifth of its cattle, and one-third of its number of pigs also producing a large share of Australia's grain, including wheat, corn (maize), and sorghum. And, of course, Sydney is the greatest national and one of the biggest Asia-Pacific centre for finance and insurance offices, banking headquarters and property services.

Post-industrial Sydney is powered by information technology, so the normal operation of the service sector is no less important to it than the launch of the industry. The state's GDP exceeds $350 billion, but the contribution of the coal economy is only about $5 billion while tourism brings in more than $25 billion and is responsible for employment of more than 8%. The territory of New South Wales itself has more than 780 national parks and protected areas covering more than 8% of the state's territory. Although the proportion of tourists it receives has fallen over time Sydney is still the gateway for many other tourist destinations.

So, a nearly one million people are going to return to work by July in the state. New South Wales will allow cafes and restaurants to seat ten patrons at a time, permit outdoor gatherings of up to ten people, and visits of up to five people to a household from May 15. Playgrounds and outdoor pools will also be allowed to reopen with strict limitations. The state earlier announced schools would reopen from Monday, but will only allow students to attend one day a week on a staggered basis. "We continue to take a cautious approach in New South Wales, but also one which has a focus on jobs and the economy, because we can't continue to live like this for the next year or until there is a vaccine," the state's premier Gladys Berejiklian told reporters on Sunday.

Western Australia closed its borders in March but they had only one new COVID-19 case in the past 11 days, so it's moving ahead faster allowing indoor and outdoor gatherings of up to 10 people at homes, weddings and funerals, and from May 18 the state will allow gatherings of up to 20 people, including at cafes and restaurants. In South Australia, shops reopened on Saturday, including big malls, and the state now allows holiday travel within its borders. In Queensland state, the state allowed people to travel up to 50 km to visit national parks.

All of the above, of course, does not mean that the Australian Dollar will become more and more expensive right now. For example, just this afternoon, investors are seeing a noticeable technical pullback down in AUD/USD, mainly due to a competition between financial flows into Australian government bonds and into US Treasuries. The yield on Australian ten-year bonds is now at 0.95%, and they have the safest AAA investment rating while the coupon yield on similar US securities is just under 0.70% and may be even lower if rumours about the Federal Reserve possible moves to negative interest rates intensify by the end of 2020.

Not only does the higher coupon yield and the lack of serious prospects for its decline play a role for Australia in this dispute, but also the need to diversify the bond portfolio. However, on the side of US Treasuries and, accordingly, for the US Dollar, it may be fair to say that the exchange rate of the Aussie against the American currency is relatively high now. The downward long-term trend since 2018 is not broken and there are no clear signs of its reversal despite an impressive 18% rise in AUD/USD over the past eight weeks.

The market is trying to optimise the benefits of the difference in coupon income and the risks of the exchange rates. The market majority was optimistic after the Aussie reached its bottom at 0.55 for AUD/ USD in the March bottom, and considered the support of 0.6250 as cheap and profitable purchase for April, but still suggests that the resistance zone of 0.6560-0.6680 of March and April highs as a natural barrier for further upward movement. The willingness (or unwillingness) of the US stock indexes to grow higher may also be of fundamental importance for the Aussie: the higher the S&P500 index climbs, the easier it is for the Australian currency to also go up. And vice versa, if the stock indexes resume a downward correction, this may cause additional runaway "to the quality" that usually means buying the US currency by the markets' majority.


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Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

Material posted here is solely for information purposes and reliance on this may lead to losses. Past performances are not a reliable indicator of future results. Please read our full disclaimer.

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