Finally some reprieve for the AUD in the month of April. The Antipodean outperformed with a 6% move to the upside against the USD. Optimism surrounding the flattening of infection rates for COVID-19, and the potential easing of restrictions buoyed both the ASX and AUD. Continued fiscal assistance from the Federal Government, as well as headline inflation picking up to 2.2% y/y provided further support. The Q1 inflation figure is the highest seen since Q3 2014, but it is important to note that this is largely due to a spike in food demand, resulting from the panic buying we saw in March. A material reduction in inflation for Q2 is expected.
On the other side of the cross, the month of April continued the trend of what can only be described as the ‘jobageddon’ in the US. In just 6 weeks, over 30 million people have signed up for unemployment benefits. COVID-19 is wreaking havoc on the US economy, with Q2 GDP estimates now ranging from -15% to -40%.
This was obviously good news for the importers, with those transacting on spot purchasing their goods at a 6% discount. The question is now, how much further can this rally last? Another escalation in the US-China trade war, and the deterioration in their relationship is likely to put a short and sharp stop to this. In fact, President Trump announced on Friday that the US might impose new tariffs as a result of China’s response to the pandemic. And with this, risk appetite left the markets and the AUD is already down over 1.5%.
Trump has consistently legitimized his presidency on his ability to create jobs and a heated stock market. With jobs being lost at an exponential rate, and a crash in the stock market, he will likely lay blame on China. With the China hawks (Navarro, Pence and Pompeo) in his ear, there is increasing evidence for further deterioration to come. We know from 2018, that the risks associated with a US-China trade war to global growth will be priced into a weaker AUD. The chart below is a reminder of the price action seen as months of threats led to sweeping tariffs in July. Within the context of a global pandemic, this could be significantly worse.
Therefore, the importers need to be prepared for the potential of further downside risk. The first place to start is identifying your costing or budgeting rates. For those who can’t reprice their goods, this is the rate that ensures the profitability of your imports. If this rate is close to the current spot rate, then looking at some hedging may be a prudent idea. Please contact your account manager and they will assist you with a hedging program to support your costing.
For the exporters, those with some risk appetite might continue to trade the ongoing risk in the markets and transact on spot. A reversal from Trump on the China tariffs may be your trigger point to manage your downside risk with some hedging. How this unfolds will likely be a key factor in market dynamics heading through May.
Key Releases for May
Below we include the key scheduled economic releases for May. We highlight the key events to markdown. Ask your account manager how these releases will have a short-term impact on the rate so you can take advantage of any spikes if the data is better/worse than expected.
Disclaimer: These comments are the views and opinions of the author and should not be construed as advice. You should act using your own information and judgement.
Whilst information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed.
All opinions and estimates constitute the author’s own judgement as of the date of the briefing and are subject to change without notice.
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