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RBA Slashes rates to 0.1%

As predicted by many analysts, the Reserve Bank of Australia has slashed rates from 0.25% to 0.1%, a 15-point cut. Furthermore, they've decided to buy back over $100 Billion government bonds of maturities around 5 to 10 years over the next six months.

Interest Rates Slashed to 0.1%
AUD/USD down 0.44% on the news

The Australian Dollar again, the U.S dollar was down slightly at 0.44%. The ASX 200 was up around 1.88% on the announcement.

Reserve Bank of Australia less dovish on the future of the Economy

The Bank stated they believe that the "economic recovery is underway and positive GDP growth is not expected in the September quarter" despite the restrictions in Victoria. They predict that GDP growth will be around 6% over the year to June 2021.
They believe that the employment rate is expected to be high – however, it may peak at around 8%, rather than the 10% expected previously. The RBA stated that they are "committed to doing what it can to support the creation of jobs."

This is the third time this year that interest rate has been cut. From 0.75% - 0.5%, 0.5% to 0.25% and now 0.25 to 0.1%.

Treasurer Josh Frydenberg stated that many families would benefit from the rate cut may be able to and lift the country out of a recession. He references someone with a $400,000 mortgage that may save around $1,000 a year from the 0.75% - 0.1% basis point cut. With that said, interest rates are relatively low, so the benefits may be negligible to many, considering the potential further costs of re-mortgaging.

Low rates may be welcome for the housing market of Australia

Demand for housing may increase on the rate cut, possibly helping the Australian economy boost out of the current recession caused by the Coronavirus. However, some analysts predict that the RBA's cut will not increase demand as rates are at rock bottom. ANZ" s Banking Group Ltd CEO Shayne Elliot stated that "If homeowners don't want a mortgage at 2.5%, it's not clear to me they'll want one at 2.4%."

With the lockdown forcing many Australian Citizens to stay at home, the nation's saving ratio soared to a 46-year high to almost 20%. Furthermore, there is evidence from the RBA that credit card balances are being paid off faster. These are positive factors, which may push Australia out of the recession quicker once lockdowns and the Coronavirus are in the past.

Some analysts are not convinced the RBA is not doing enough. James McIntyre, Australia economist at Bloomberg Economics, stated, "with a sluggish demand outlook and a weaker labour market justifying further policy support, it is difficult for the RBA to make a case to hold back," insinuating he believes that the RBA must do more to push Australia out of the slump.

It is essential to keep an eye on the other side of the equation, the U.S dollar, as the election approaches less than a day. Trade safe!

Is the Australian dollar set to fall on a Biden win?

We are 13 days away from the election. Many polls state that Biden is winning the votes – however that’s what happened in the 2016 election. With big banks citing a decline in the Dollar over a Biden win, what will happen to commodity currencies such as the Australian Dollar and the Canadian Dollar against the US Dollar?

The Australian Dollar against the US Dollar has had a strong comeback, up 30% from its March lows. This was due to Australian commodity prices such as copper, nickel, and iron rebounding as manufacturing restarted worldwide.

Australian Dollar against green policy

If Biden were to be re-elected, a risk to the Australian Dollar is his supposed $2 Trillion push for a greener future, pushing initiatives that would create the opportunity cost for using cheap power sources such as oil and coal as supposed to greener alternatives such as solar and wind, lower. A report by BloombergNEF showed that the “Levelized cost of electricity for onshore wind projects has fallen 9% to $44 megawatt-hour since the second half of last year… with solar [declining] 4% to $50 a megawatt-hour”. They also cite that prices are lower in countries such as the United States, China, and Brazil, and that “Best in class solar and wind projects will be pushing below $20 per megawatt-hour this side of 2030”. This is not good for commodity currencies such as the Australian Dollar and the Canadian Dollar, as they are notoriously known to sell off when green policies are enacted.

Australian Dollar against the US Dollar may be bracing for a fall come election time in the US

Therefore, it is likely that the Australian Dollar will sell off if Biden is elected. Given a predicted selloff too in a US dollar, we may see the pair make a violent move to the downside. Near the end of September, we saw a selloff in the pair, retesting that healthy 0.7 support level. The AUD/USD has been ranging ever since between the 0.7 and the 0.725 marks. However, a Biden win may see the currency pair down to 0.6925, a historically strong support/resistance level, and a full Fibonacci retracement from 0.74 to 0.6925.

Are you looking at the Australian Dollar?

Is the future for the Australian dollar downwards?

AUD/USD has been a strong performer in the currency markets, returning just under 30% since its March lows. We talked about how the Australian dollar was poised for a rally on a market recovery earlier this year.

Australian Dollar selling off in the past couple of days

The market has recovered, and the Australian dollar has recovered with it. This was due to the Australian dollar being mainly a "commodity currency," with manufacturing worldwide slowly starting to pick up, specifically in China. Erik Nelson from Wells Fargo stated that "If you consider some of the fundamentals in Australia, you can justify the valuation of the Australian dollar at current levels" and that Australia is "very well positioned right now" about its exports to China.

However, the AUD/USD has fallen over 3% in the past couple of days. This has been on a multitude of factors, the US Dollar strengthening on Donald Trump's recovery, recent weakness in the oil prices, and the tremulous Coronavirus situation in Australia have pushed the Aussie lower.

Is this a long term trend for the Australian dollar, or just Market Volatility?

Yesterday, the RBA left rates at 0.25%, which it has been since the initial rate cut in March. RBA's Governor Philip Lowe stated that the decision was based on the uneven recovery of the global economy due to the Coronavirus – "The global economy is gradually recovering after a server contraction due to the pandemic. However, the recovery is uneven and its continuation is dependent on the containment of the virus".

Analysts are predicting a rate cut in the next six months. However, there is little chance for rates to fall into the negative as Governor Lowe historically has been against negative rates, citing that they are "extraordinarily unlikely in Australia" due to the documented downsides on consumption sentiment.

Furthermore, Australia has been able to control its second outbreak in the state of Victoria, enabling them to focus on the path to recovery from the Coronavirus. The RBA also stated that "Labour market conditions have improved somewhat over the past few months and the unemployment rate is likely to peak at a lower rate than expected"

With elections coming up in the United States, the Trans-Tasman bubble between New Zealand and Australia coming to fruition, and Australia slowly recovering, market volatility may affect the AUD/USD pair, rather than a long term trend. I believe the Australian dollar's tailwinds are a lot stronger the potential headwinds it may face.

Anish Lal has some excellent analysis on the recent market drop due to Trump's tweet - you can watch it here.

Australian dollar to 75c?

The Australian Dollar has seen a strong bull rally - up 12% from its March lows. Now bulls are edging for the currency to push higher.

AUD/USD slowly creeping up to that 75c mark, not seen since May 2018

A possible push of the Australian dollar to 75c against the U.S dollar is a level not seen since May 2018. During that period where it first dipped below 75c, there were many retests in the following months before we finally saw a sold push below the 75c mark. This historical dynamic may require bulls to have strong momentum if they want to pass that 75c mark.

The Australian Dollar is noted for being a commodity currency – that is, the value of their currency against other currencies is mainly correlated from the price of commodities they export. You can see this correlation with the price of Iron and Copper.

That 12% push from its March low has been due to its largest export partner, China, seeing their demand for Australian resources sour amongst the Coronavirus pandemic and their souring relationship regarding barley and wine exports.

Australian Dollar underpinned by Commodity Demand

When put side by side, the correlation between Copper and the Australian Dollar is clearly visible.

Australia’s Minister for Resources, Keith Pitt told the Financial Times in a recent interview that the mining and energy sectors were underpinning the domestic economy, which has been battered by a second wave of the Coronavirus that has forced many businesses in Melbourne to shut their doors for another couple of weeks. He also states that “62% of China’s Iron ore imports came from Australia in 2019-2020,” reiterating that commodity correlation.

However, more institutions are bullish on the Australian Dollar. Notably. Commonwealth Bank of Australia stated that “the recent rally in some commodity prices seem unstoppable,” hinting at the idea that commodity prices are an essential driver of the Australian Dollar.

It also helps that over the past couple of weeks; there has been a trend of de-dollarisation amongst traders and investors. This may be due to a mix of factors, including a 34% rally in Gold, unprecedented fiscal stimulus and quantitative easing, and a strong rally in U.S equities forcing investors and traders out of the U.S dollar.

If we continue to see strong demand for commodities such as Copper and Iron, we may see both the Australian Dollar and the prices for those rally in tandem together.

Speaking of Copper – a senior analyst here at BlackBull Markets, Anish Lal did an excellent technical overview video on whether copper will hit 80c – You can watch it here.

Safe trading!

Trans-Tasman bubble a dream?

There have been talks for a Trans-Tasman bubble since the Coronavirus lockdowns in March. However, different approaches from New Zealand and Australia have made this reality more a far fetched dream.

Trans-Tasman bubble would greatly help both economies

Although both countries would benefit from the trans-Tasman bubble, New Zealand would arguably benefit greater due to 5.8% of GDP being attributable to Tourism. Over 180,000 individuals are employed due to tourism and make up about 7.5% of the workforce in New Zealand.

However, as much as a trans-Tasman bubble is encouraged, the difference in approaches has made it challenging to implement. With New Zealand digging their heels and imposing one of the strictest lockdowns in the world, while Australia gave their citizens relative freedom, only imposing social distancing guidelines. The contrasting methods have become evident – with Australia still making records in daily Coronavirus cases, while New Zealand consistently records single-digit case numbers. Victoria, Australia, reported 428 new Coronavirus cases on Friday, making it the state's largest daily increase since the pandemic.

This is on the back of the Prime Ministers' Scott Morison and Jacinda ADern opening up travel between the two countries. Scott Morison stated that "she [Jacinda Adern] raised the very issue [the bubble] with me, and we're progressing those discussions." However, he also stated that it is "going to be a little be moderated for what's happening in Victoria," insinuating a possible exclusion for citizens that live in Victoria. Melbourne, a major city in Victoria, recently hit 5000 Coronavirus cases as the city re-enters a second lockdown.

Trans-Tasman may move the needle in the markets

The AUD/NZD depreciated to parity in the middle of March as risk currencies dived – with the NZD showing some strength due to New Zealand's efficient suppression of the Coronavirus. However, the Australia dollar has since rebounded, trading at the 1.067 level. There may be an argument for the Australian dollar is slightly overvalued compared to the New Zealand dollar as New Zealand's economy has been restarting without any relative setbacks. However, as demand for commodities such as oil and iron rises across the world of which Australia is a major exporter, demand for the Australian dollar may increase, strengthening relative to the NZD.

AUS200 in Blue, NZX 50 in Red

However, the significant indices for Australia and New Zealand may show outperformance, rewarding New Zealand in their Coronavirus suppression. Since their March lows, the NZX 50 has outperformed the Australian 200 Index by 4%. If New Zealand continues to outperform with regards to the Coronavirus relative to Australia, we may see a good opportunity to shorten the ASX and go long the NZX.

If both countries took the same approach, I believe there would have been a trans-Tasman bubble sooner. Australian Tourism Industry Council Executive Director Simon Westway stated that "Australia needs to get back on its feet before Trans-Tasman bubble," and that Australia needs to open its domestic borders between states before opening up to New Zealand. Jacinda Adern took a stab at Australia's Coronavirus response, stating on video that "If Australia wants a whole country trans-Tasman bubble, we'll be waiting."

Markets are mixed while currencies range

Markets the US and around the world are mixed as investors and traders take a cautious stance on the economy. NASDAQ edges a 0.29% gain, while the S&P 500 and Dow Jones ended lower at 0.78% and 1.09%, respectively. AUS 200 edges lower.

NASDAQ in Red, S&P 500 is in Blue, Dow Jones is in Orange

Equity markets end fundamentally mixed

With the Coronavirus still front and center for many, investors are taking solace in "Coronavirus proof" equities – primarily in tech with their cashflow generating abilities during a downturn and their fortress balance sheets. This is on the back of Fed chair Jerome Powell stating that "we [the Fed] are not thinking about thinking about raising rates." However, it would be unwise to fight against them propping up the market. If they are committed to asset purchases alongside no drastic negative news with regards to the Coronavirus, major indices should continue to tick up. It is interesting to note the Fed's current dynamic, which is essentially a full believer of the markets during a boom, seem to doubt their ability to price securities in a downturn.

Currencies also end up mixed

Many currencies have been ranging with no significant moves to the upside or the downside. The cable has been fluctuating from 1.252 - 1.257, while the AUD/USD and NZD/USD have been trading between 0.68 -0.69 and 0.64-0.65, respectively. Currencies have been heavily affected by the risk of/risk-off dynamic that has been played out recently in the markets. Traders have been flocking to the USD on any negative sentiment due to the Coronavirus, and vice versa, when positive signs emerge.

The oil markets have a long way to go

Cushing Oil storage show that oil inventories have been decreasing

Oil markets have been struggling to cover the gap that was caused due to the Saudi / Russia price war and the Coronavirus. Brent and WTI are currently at $40.45 and $37.87, respectively, trying to cover that gap to $45.65 and $41.61, respectively. Furthermore, OPEC states they are committed to continuing the initial price cuts until the end of June; however, it maintains their bearish stance on oil demand. They forecast a drop of 9.1m barrels per day by the end of 2020.

With traders and investors experiencing relatively low-volatile trading days, this may be an excellent opportunity to assess current and future positions without the fear of the markets whipsawing against one's trade.

US Dollar weakens as investors’ appetite for risk increases

The US Dollar index weakens for the 7th straight day as investors' appetite for risk increases. The AUD/USD has broken the 0.69 mark, with the USD weaker against its G10 currencies, with global indices rising on forward optimism on a quicker recovery from the effects of the Coronavirus. US Indices have seemed to quickly discount the effects of the protests as they continue for the 8th straight day.

It is interesting to note how strong expectations and consensus have been on the market. It seems to have some binary optimism-o-meter, where the market is like "okay if my optimism-o-meter is above 1, markets rise." Markets, in general, tend to be forward-thinking. However, as of late, future optimism has been trumping future imminent damage. It has taken much imminent danger to earnings to change the market consensus drastically but has only required a little to brighten up the markets' spirits. It kind of reminds me of this video – US Indices only plummeted when push finally came to shove, when the Coronavirus was on the mainland. But indices are up, on earnings expectations months, even years down the line.

Around mid March was when the bulls boat hit the cliff

Fundamentally, the demand for the US Dollar is slowing down

Fortunately, fundamental signs are supporting the depreciation of the US Dollar. China's manufacturing sector has seen an increase in appetite for Iron from Australia, Oil breaching $40 showing demand picking up, and institutional and retail investors after being taught to buy the dip, have been buying the dip. However, as from my article yesterday, there has been this massive disconnect between Wall Street and main street. It almost seems like every time an event happens, which would typically fuel a risk-off rally, the market seems to reset their time horizon further. However, if we ignore the Coronavirus and protests, economic data is still abysmal.

Some still believe in a "V-shape" recovery, weakening the US Dollar

Mark Mobius, co-founder at Mobius Capital partners, still expects a V-shape recovery, pointing to the market moves as an indicator to future gains. He is bullish on further employment recovery, predicting that the US Government will implement fiscal stimulus in the form of infrastructure spending in order to give many Americans work.

It would be wise to keep some dry powder for a potential second wave when keeping the US market in mind or investing in countries with a better Coronavirus outlook. Investor's temperament must stay in check while seeing markets slowly tick up – the possibility of a second wave was highly likely in the United States before the protests, now they might just be adding fuel to the fire. It may be tempting to buy companies at an all-time high. But before you press that buy button, remember this video and remind yourself how the markets have been in the past couple of months.

Anish Lal has a great video on the weakening of the US Dollar against the Euro. You can watch it here.

Commodity currencies strengthen as demand for oil and metals increase

Commodity currencies are set to advance as manufacturing and oil usage rise across the world.

The returns of the CAD & AUD against the USD. Note: Lower is better as it means the USD is depreciating against the respective currencies.

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.

Commodity currencies getting a boost from demand

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 decision: What to expect?

"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.

RBA's Interest rate against Unemployment Rate

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.

A pair for the recovery

What currency pair is poised to bounce back in the recovery? Since the start of the Coronavirus, the Australian Dollar has depreciated sharply against the US Dollar. However, history has shown to repeat itself in regards to economic shocks and this currency pair.

AUD/USD Pair, Weekly Candles

During the 2008 Financial Crisis, the AUD/USD pair followed a somewhat explainable trend – it depreciated at the peak of the recession and appreciated once economic activity and the recovery started in mid-2009.

AUD/USD,  Weekly Candles

Whats the big driver for the Australian Dollar?

The Australia Dollar has been considered by most as a commodity currency – in that it tracks the price of the commodities it exports – mainly iron, copper, and coal. In economic downturns like the one we are currently facing and 2008, manufacturers who use iron and copper tend to slow down their production or halt it together. Lower demand for iron and copper not only implies a lower price for said commodities, but it also means fewer exports from Australia, therefore less demand for the Australian Dollar.

AUD/USD against Coal over 10 years
AUD/USD against copper over 10 years
AUD/USD against Iron Ore over 10 years

If we take into account that investors tend to decrease their exposure in risky assets and safer assets such as the US Dollar, Treasuries, and Gold, there is a compounding effect on the AUD/USD as there is less demand for the AUD and an increase in demand for USD.

Is the road to recovery in sight?

The thesis of a long AUD trade hinges on one fundamental question – do we see a recovery in sight? A difficult question, as it implicitly asks to predict a bottom in the stock market, productivity, and in this case – the effects of the Coronavirus. Signs of an economic recovery are showing, albeit tentatively. Countries are slowly emerging out of lockdown, oil inventory buildup in the United States was 2.7m less than predicted, and there have been talks of creating “mini bubbles” with countries. But, if we take a look historically at what the market movements have been in the previous recession.

SP500 during the 2008 Recession
SP500 during the current Coronavirus pandemic

A similar pattern emerges

After the initial drop in 2008, there was a short bull period before another further drop in prices in early 2009. A similar pattern can be seen in the 2000 – 2005, following major events such as the dotcom burst, the September 11 attacks alongside the further correction in 2002. If history repeats itself, we may likely see a similar pattern in the following months. Talks of a “second wave” of coronavirus cases, alongside earnings season and muted demand across all sectors may be the catalyst for a drop asset prices.

It is clear that the AUD/USD pair appreciating is contingent on manufacturers dependent on their exports restarting production. An implicit proxy for this is the directional trend of the market. As stated above, history shows that there may be another depreciation in the Australian Dollar and the market. However, history also shows that once manufacturing activity does restart, the Australian Dollar is likely to appreciate. Furthermore, headwinds for the Australian Dollar include extensive quantitative easing and expansionary fiscal policy in the United States, which has historically driven the US dollar down.

Is it time to think about a position in the Australian Dollar?

Here is Anish Lal on his short term analysis on the recovery of the Australian Dollar and the ASX in light of geopolitics. Watch the video hereOr alternatively, click the thumbnail below,