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FX Update

Worldwide coronavirus cases surpass 14.9M with over 616,400 deaths officially reported.

The New Zealand Dollar (NZD) and the Australian Dollar (AUD) both performed strongly this week gaining against most other currencies. Positive risk sentiment was definitely a factor with optimistic headlines doing the rounds regarding potential Covid vaccines by the end of the year. We also had an agreement on a EUR750 Billion recovery fund in the EU, while in the United States Democrats and Republicans are in the process of negotiating another stimulus package. Global equities continue their strong run, thanks largely to the unprecedented levels of money creation by central banks, and that excess liquidity combined with positive risk sentiment really has been the driving force in markets for much of this week. Both gold and silver are also benefiting in this environment and it is hard to see their bullish trends turning around any time soon. There are risks out there however and increasing geopolitical tensions should not be ignored. Tensions between the US and China deteriorated further this week with the US ordering the Chinese consulate in Texas to be closed. We wait to see what sort of retaliatory action China will take.  In the past 12 hours we have seen US unemployment claims for the past week come in above expectation at 1.4m. This provided a bit of a reality check for markets and triggered a mild “risk off” correction.

Looking more locally, the recent Covid outbreak in Victoria looks to be far from contained with another 403 cases reported yesterday. It has yet to have a material impact on the value of the AUD, but that point could certainly come if positive cases start surging in Sydney and other cities as well. As expected, business confidence is in the doldrums printing at -15, down from a prior -11, with the current conditions’ component producing its worst reading since the early 1990s. The RBA minutes released on Tuesday afternoon certainly did nothing to dampen the AUD’s spirits. The central bank suggested they were comfortable with the level of the AUD and that it was not out of line with fundamentals. This largely green lighted the gains seen in recent days. Yesterday’s Australian government fiscal and economic update forecasts unemployment at 8.75% in 2020/21 and net debt to GDP at 35.7% by mid next year.

There has been little data of note from New Zealand this week with only Wednesday nights dairy auction and this morning’s trade balance drawing any attention. The GDT price index fell a small 0.7% while the key whole milk powder component gained 0.6%. Overall dairy prices remain well supported leading to relatively strong farmgate milk price forecasts for the 2020/21 season.

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