Commodity currencies are set to advance as manufacturing and oil usage rise across the world.
The Australian dollar and the Canadian dollar have been stuck within their respective consolidation zone, strengthening over the past couple of days. As the correlation between commodity currencies and commodity prices remain relatively strong, with the Bloomberg commodity index advancing 2.5% to 63.24, the highest since the start of April.
As China’s oil demand starts to reach pre-Coronavirus levels, manufacturers have started to purchase more iron and copper from Australia. However, tensions between the two countries have slowly risen, possibly dampening the likelihood of a breakout. In this case, China slapped an 80% tariff on Australian Barley exports, a $330 million industry. Many analysts speculate that these tariffs are in response to Australia’s strong push for an independent investigation into China's response regarding the Coronavirus. However, it is more likely due to the Australian government subsidizing exports barely, enabling exporters from Australia to sell them barely at lower than market prices – a process also known as “dumping.”
However, Adam Kibble, an investment specialist at Inisght, is bullish on the Australian dollar, seeing it rally to 70c against the greenback by year-end. Furthermore, he told Bloomberg that “Exiting the virus earlier [Australia], compared to Europe and the U.S., will be very positive for the Aussie.”
Moreover, with the Canadian dollar being sensitive to the change in oil prices, the price of the black gold has strengthened the loonie against the U.S. dollar. As a result, the boost cushions agriculture and commodity exporters into the U.S. Furthermore, other oil sensitive currencies such as the Norwegian Krone and Russian Ruble have strengthened over the past two days as demand for oil increases.
In spite of these currencies rising, today was generally a risk-off day after the risk-on rally yesterday. Here are the leading market moves:
As a senior analyst at Blackbull markets, Andre Almedia did some excellent technical analysis on the USD/CAD pair. You can watch it here.
"RBA would hold the cash rate steady at 0.25%, " analysts at Wespact predict.
Is there a possibility of a rate cut?
What are we to expect with RBA’s decision today? On the back of two rate cuts from 75 to 25 basis points, the focus remains to be on the outcome of the Coronavirus. Australia’s current figures stand at 6,825 confirmed cases with 95 deaths, an implied fatality rate of 1.39%, one of the lowest in the world. The real test, not just for Australia, but for the majority of countries who have had strict lockdown restrictions is following weeks after lockdown is lifted. A possibility of a second wave may force governments to implement stricter lockdown procedures, all but destroying short term economic recovery. This may spur the RBA to cut rates even further or increase their daily purchases in government bonds.
However, there are tentative signs which point to the RBA leaving rates as is. Firstly, they have reduced their daily purchases in Australian Government Bonds from $4-5 Billion a day an average of $750 Million. This may imply that they are giving themselves some breathing room and firepower just in case the Coronavirus outlook gets worse once businesses return to normal, stating that “If conditions warrant it, we will return to daily bond purchases.” A similar rationale could be used to predict whether or not they cut rates later today.
The immediate due to the Coronavirus is predicted to be around $50 Billion AUD, seeing GDP plunge 10% in the June quarter according to Treasurer Josh Frydenberg.
The Reserve Bank of Australia has a mandate of achieving full employment, ensuring the stability of the currency and the economic prosperity of the people of Australia. Philip Lowe, Governor of the Reserve Bank of Australia, stated that he was “confident that our economy”; however, he further emphasized that the “unemployment rate will remain above 6%” over the next couple of years. He also cautioned against “returning to business as usual” as it would “cast a shadow” over the Australian Economy. This suggests a prolonged period of low rates until they are on track to achieve their full employment target of 4.5% again.
Potential upside for the AUD?
We should expect some volatility around the time of the RBA’s decision. As analysts forecast no rate changes, all eyes are on the RBA’s forecast for the Economy. A better than expected forecast may push the AUD to the upside, on the back of geopolitics between the United States and China pushing the AUD down, which Anish Lal explained in an excellent video here.
An abysmal US Retail Sales figure of -8.7% for March, all eyes are on the release of Q1’s Retail Sales figure for Australia, as it may give some insight on the potential damage the mandatory closures of retail stores have been.
Talks to reopen borders between Australia and New Zealand
With New Zealand reporting an unprecedented zero new cases on Monday alongside Australia having one of the lowest fatality rates, talks between both governments on reopening borders between countries have started. This may help boost the shattered tourism industry in New Zealand, while slowly spurring demand in both countries and giving some slight relief, if any, to airlines. But Prime Minister Jacinda Ardern warned that there would be much work required to make a “Trans- Tasman bubble” safe and hinted that would not be such a bubble in the shorter term.
News of the bubble being implemented would bring significant tailwinds for both the NZD and the AUD. If all goes to plan and the coronavirus outlook after the bubble has been implemented remains stable, the chances of the RBA's decision of leaving rates as-is will drop significantly.
Phliip Van Den Berg, an analyst here at Blackbull markets has some excellent technical analysis on the AUD/CAD pair in light of the RBA’s decision later today. You can watch the video here.