The Australian Dollar
It’s been a relatively muted day in Asia where most of the focus has fallen on commodity currencies. But trade war risk continues to simmer.
The AUD is outperforming its G10 FX peers on the back of monetary policy divergence and a relatively high correlation to US equities. The minutes of the May 5 RBA meeting unsurprisingly echo the policy statement:
"The outlook remained uncertain, although if infection rates continued to decline and restrictions were eased, a recovery could be expected to start later in 2020, supported by both the large fiscal packages and the monetary policy response."
Since the beginning of the month, tensions between Australia and China have ramped up, with Beijing taking anger at criticism of its coronavirus response. After barring some meat imports from Australia, China is now imposing anti-dumping duties on barley imports. The AUD hasn’t flinched, with more positive risk sentiment getting driven by reflationary inputs from the S&P 500, particularly around oil and commodity miners.
Optimism around the local economy reopening continues to resonate and is currently outweighing the potential negative impact of growing trade tensions.
The New Zealand Dollar
RBNZ Assistant Governor Hawkesby says the central bank sees no need to adjust stimulus in the wake of the government's budget. This has predictably triggered more shorts to cover as much of the recent NZD sell-off came on the back of an uber dovish RBNZ.
Trade war risk simmers
The coronavirus pandemic has led to a worsening of US-China relations after the US openly blamed China for the epidemic. A recent Pew survey conducted in March found most Americans view China unfavorably, and China hawks in the US government are pushing for more financial sanctions and more tech restrictions. The White House has reportedly ordered the federal pension to halt investments in Chinese equities. The US has also tightened export controls to China and announced much more stringent additional restrictions on China's Huawei.
The markets may be pricing in far too much complacency that US-China 'phase one' trade deal could be at risk, as the pandemic and resulting acute economic downturn have made China's trade commitment to the US much more challenging to fulfill.
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Soaring US yields trigger the wrecking ball effect as yields become a source of volatility for risk, rather than a source of support