The AUD has been very strong recently but is there time now for a correction. Anyone observing the AUD’s recent strength will be aware of that possibility as markets do not move in straight lines for very long. A recent Bloomberg piece made a case for an AUD correction at 0.7184 or before.
The reasons for the AUD’s strength have been the optimism surrounding the global recovery post COVID-19 Economies are opening up and vaccines are on the way. The US has selected Moderna, AstraZeneca, Johnson and Johnson, Merck, and Pfizer as vaccine candidate finalists. Risk-on assets have been strong in the last few days. ADP jobs data yesterday showed a fall in 2.7 million jobs. However, it was not as bad as the 9 million job losses expected. This further helped risk rally on as the expectations for a V-shaped recovery increase. One note of caution is that there are a number of risks still in the market: Brexit, US-China trade tensions, China-Australia tensions, ECB decision later today, headwinds from the frugal four concerning the European relief fund, and that is not to mention the second wave infection risk from COVID-19. Yet, the risk-on rally continues and pulls AUD higher along with it. The chart below shows the relationship between the AUDJPY and the S&P500. Notice how the AUDJPY (risk on pair) tracks the S&p500.
Recession coming for Australia?
Australia’s Treasurer, Josh Frydenburg, admitted the economy may be heading into a recession after the GDP print for Q1 which came in negative. If the AUD keeps rising the RBA may be concerned about having to raise interest rates given the economy may be heading into a recession.
Tensions from China could weigh on AUD
US-China and China-Australia tensions will also weigh on the AUD. Around 30% of all of Australia’s GDP comes from China. So this means that any tensions with the yuan weigh on the AUD too. This is why the AUD is often traded as a proxy for the yuan. Asset managers as a group are also net short on the AUD, so watch out for any significant increase in bearishness in the COT report.