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Australian Dollar, ASX 200 Hint at Resilience Despite Virus Fears

Australian Dollar, ASX 200 Hint at Resilience Despite Virus Fears

2020-02-13 02:48:00
David Cottle, Analyst
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Australian Dollar, ASX 200, Coronavirus - Talking Points:

  • Australian stocks, yields and dollars have begun to rise in lockstep again
  • They were doing the same as 2019 bowed out
  • This trade speaks to considerable optimism underlying virus-related jitters. Can it prevail?

From the Australian Dollar to the ASX 200 equity benchmark, Australian assets are some of the most closely correlated to global growth expectations of all widely-traded vehicles.

They’ve certainly taken a hit as the coronavirus has come to dominate the news cycle, but do they also perhaps indicate significant underlying resilience?

The last quarter of 2019 saw the Aussie, the ASX and Australian bond yields all rise together. The ‘virtuous’ dynamic broke the trend seen earlier in the year. Back then the currency and its yields slid in anticipation, and then on the fact, of lower interest rates both in Australia and the US. Stocks duly rose on the same impetus, providing us with a broad map of market action familiar since the financial crisis.

CHART - Australian Dollar Index (white), ASX 200 stock index (red), Australian 10-year bond yield (turqoise)

Australian Dollar (White), Bond Yields (Turqoise) and Stocks (Red), Daily Charts

Chart Created With Trading View

Now all three are rising yet again. The rise is admittedly tentative in the case of the currency, but it has clearly bounced in the last week, perhaps putting the virtuous trade back on track.

2019 Ended In Rare Optimism

The end of 2019 was hopeful as major problems which had long bedeviled markets showed signs of resolution. The US and China had signed an interim trade deal. Alright it was no more than a tariff truce but that in itself is no small thing for global risk appetite. The two sides are still talking and, for all their posturing for home audiences, both need a good settlement. The UK ejected a strong majority government ending years of Brexit gridlock. Alright, negotiations on the post-Brexit trade landscape will be torturous, but at least they can now get started.

There was also some hope that governments would at last get serious about fiscal stimulus, relieving a burden which has fallen largely on the straining shoulders of central banks for the last decade.

Now, perhaps some of this optimism was overdone, but all the reasons for it were real enough, and behind the coronavirus headlines still pertain.

Perhaps they explain the resilience we can see now across Australian markets, and maybe also to gains yet to come should the worst fears about coronavirus go unrealized.

Of course, that’s the elephant in this theory’s room. No one can yet say how the virus story will play out, or what it hit it will eventually deal to the world economy. Monetary authorities seem content to say it will be manageable, but they can only hope. They can’t know.

And, yes, those monetary authorities look very short of ammunition with which to defend their economies should things really head south. This is another reason why optimism should be tempered with a healthy degree of caution.

However, despite considerable day to day volatility, Australian markets may suggest that investors are not as panicky in 2020 as the headlines suggest.

AUD/USD BULLISH
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily -20% -4% -9%
Weekly 1% 8% 6%
What does it mean for price action?
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--- Written by David Cottle, DailyFX Research

Follow David on Twitter @DavidCottleFX or use the Comments section below to get in touch!

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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