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Key Takeaways
- Australia’s success in containing Covid-19 has fueled investor demand for Australian assets and currency.
- Recent sell-off in AUD is due to broad strength in the safe haven US dollar in these increasingly uncertain times.
- Deteriorating diplomatic relations with China is negatively impacting Australia’s exports to that country.
Australian Dollar (AUD)
Spot (mid-market) rate = $0.7008 (11:55am, October 29, 2020)
Summary
Recent sell-off in AUD to continue
Since peaking at $0.7414 on September 1, the Aussie has lost 4.9% of its value versus the US dollar (see table below).1 The current risk-off mood in markets should keep the AUD on its back foot, possibly for the remainder of the fourth quarter.
G10 + CNY Currency Performances (%) vs USD since September 1, 2020
Bloomberg
Australia successful in containing Covid-19
The Asia-Pacific region has been the most successful region in the world in containing Covid-19. Yesterday, Melbourne, Australia’s second largest city and the epicenter of its second wave, ended its lockdown after 111 days.2
Reserve Bank of Australia to provide further monetary stimulus
On November 3, the RBA is expected for the first time in seven months to cut rates, including its cash rate, 3-year bond target and Term Funding Facility (TFF) rate, all from 0.25% to 0.10%.3 One of the underlying goals of the RBA is to prevent the AUD from appreciating to a level that endangers international competitiveness.
Failing Australia-China diplomatic relations is disrupting exports to China
China, Australia’s biggest trading partner, has levied trade sanctions against Australia, impacting exports worth up to $19 billion a year.4 Australia has tried to distance itself from the Trump administration, but since China considers Australia a minion of the US, Australia has been caught up in consequences of the US-China trade war.
Technicals
In the course of the strong rally in the Australian dollar March to September, several long-term buy signals were triggered. These technical signals effectively reversed the long-term downtrend in the AUD/USD which has been in place since 2018. We now predict the AUD/USD to trend higher through 2021 or longer. It will not, however, be without the occasional set-back. In Q4, we expect to see more periods of high risk/high market volatility, which should trigger safe haven buying of US dollars and selling of AUD.
Final Comments
Investors remain focused on the coronavirus, moving money to countries achieving success in containing it, like Australia, and out of those that are not. In Q4, investors are faced with a rare combination of game-changing events – Covid-19, US elections and stimulus package, Brexit negotiations, and US-China trade/military tensions. We predict high market volatility, fueling safe haven demand for the US dollar, and risky assets – equities and foreign currencies – will suffer losses. In 2021, we predict resolutions to these events, and a weaker dollar. Australia – with its strong and persistent economic growth, stable pro-business environment, natural resources/commodities, and strategic location close to Asia, will attract global investments – the Australian dollar will shine next year.
Please feel free to reach out to your SVB Currency Advisor, Scott Petruska spetruska@svb.com, or John Schweizer jschweizer@svb.com – for a deeper discussion about FX, what impact it may have on your firm, and ways to mitigate risk.
