by Chris Becker
The COVID-19 pandemic seemed to be the last blow for the beleaguered Pacific Peso, dropping fast alongside other risk assets like stocks from 70 cents to 55 cents:
But it has now fully “recovered” with an equally remarkable rally, now stabilising around the 69 handle against USD, while its cousin, the Kiwi has had a similar move although it is slightly off its pre-COVID high. This symbolises how the antipodes have reacted to the virus and the market’s intent on their medium term economic growth, with V-shaped recoveries – or does it?
Westpac contend that a net flow of buyers across many cohorts of investors is pushing the Australian dollar back up to strength, with a view on yield:
The Westpac flow analysis reveals net buyside flow was the largest in at least 2 years. Breaking the flow down by participant (top right), the strong buyside was evident across all investor cohorts, which is a good sign. While all real money accounts were net buyers, it was funded accounts that recorded the largest buyside flow, which suggests that some of their motivating factors, such as carry and yield are encouraging a return to the market after they were heavy sellers in prior months.
Today’s RBA meeting for July will be illustrative to see if they can keep the talk of negative rates off the table, with no further cash rate cut expected to keep the Aussie dollar in positive territory. Look for language around handing off the stimulus to the fiscal side in September/October (when Jobkeeper ends!) as they want ScoMo to have the hot potato of reviving the economy, given there’s next to no bullets left in the chamber.
Technically, the Aussie dollar would seem to be empty now, having filled its own recovery vessel but both the daily and weekly price charts suggest a further return to strength. Note on the daily chart the strong support at the 68 cent level that has held through the latest wave of “flare-ups” of COVID-19 both locally and in the US:
Resistance at the mid 70 cent level, equating to the early June high and matching the pre-pandemic high is now under threat again, with an RBA catalyst today something to watch for above the recent daily lows.
Stepping back using the weekly charts, the downtrend from the 2017-2018 highs around the 80 cent level has been broken in the last few months as Australia flattened the curve vs the “second” wave in the US. A symmetrical triangle is forming here around the 70 cent level and if broken to the upside shows no resistance until those former highs around 80-82 cents:
Inconceivable? The RBA is reluctant to enact any further stimulus measures unlike the rest of the central bank complex, led by the Fed. With stock markets continuing to be goosed and bubbles frothing over so much that you can’t even see the bathtub any longer, the risk currency de jeure may have another day in the sun.