Australian Dollar, US-China Tensions, Reserve Bank of Australia Governor Philip Lowe Speech, Talking Points:
- AUD/USD headed lower with S&P 500 futures
- US President Donald Trump appeared to blame Xi Jinping personally for ‘propaganda’ attacks on the US
- RBA Governor Lowe lauded financial resilience in the face of Covid but said confidence was key
The Australian Dollar drifted lower on Thursday as risk aversion grew in the Asia-Pacific session on what appeared to be a ramping up of tensions between China and the United States.
US President Donald Trump directly criticized his Chinese counterpart, Xi Jinping, in a series of Tweets suggesting Xi’s direct responsibility for a "disinformation and propaganda attack on the United States and Europe.”
Trump went on to Tweet that “it all comes from the top,” in clear reference to Xi.
Previously Trump has been at pains to emphasize the strength of his personal connection to the Chinese president, even as he has blamed China for its handling of the coronavirus. Now however the administration seems much keener to make things personal when it comes to apportioning blame.
This increase in tensions saw the US Dollar gain at the expense of growth-linked currencies such as the Australian and New Zealand Dollars, while stock markets traded mixed in the region. S&P 500 futures headed lower.
Reserve Bank of Australia Governor Philip Lowe spoke Thursday at a panel webinar under the auspices of the Financial Services Institute of Australia. There was nothing new for Aussie-Dollar watchers in his short presentation which lauded the resilience of the domestic banking sector while acknowledging the Covid outbreak as a headwind of the first magnitude.
Lowe said the critical issue was the restoration and maintenance of confidence among economic agents and that the RBA was prepared to scale up its stimulative bond purchases if needed. He also pointed out that monetary policy alone has clear limits when it comes to economic revival. AUDUSD continued to head lower through the session, from its Wednesday peak of 66.16.
The RBA cut interest rates twice in March as part of Australia’s economic response to the contagion, taking the Official Cash Rate down to a new record low of 0.25%. However it has declined so far to cut further, despite asserting that all options remain on the table, presumably including zero interest rates.
| Change in | Longs | Shorts | OI |
| Daily | 2% | 14% | 5% |
| Weekly | -4% | 43% | 5% |
More broadly the Australian Dollar has shared in the strength seen from most similarly risk-correlated assets since the Covid-induced lows of March. Massive monetary and fiscal action from various central banks, led by the US Federal Reserve’s multi-trillion-efforts, was seen to have at least fended off the prospect of the sort of catastrophic, immediate, ‘credit effect’ which saw the global economy implode in 2008.
However, AUD/USD’s climb since then paused as investors considered the terrible immediate reality of guaranteed world recession and massive joblessness. Now the currency seems to be riding optimism higher, as policymakers hope that recovery will be sharp when it comes percolate through the markets.
Economic re-opening is a very gradual process, however, and the prospect of second-wave infections has hardly diminished. It also seems highly unlikely that many former economic staples such as hospitality, sporting events and even office work will be returning to their former status anytime soon. In short, the growth-correlated market, including that for the Australian Dollar, may still be pricing in a quicker reversion to normality than seems likely.
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--- Written by David Cottle, DailyFX Research
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