The AUD’s performance since the 19 March low has been nothing short of astonishing. Since then only 9 trading days to 1 May have been negative seeing the AUD/USD at a 7-week high and pushing the $0.655 handle. While AUD/NZD has not only rejected parity but at hit its highest read since November at $1.0755 as market rumours swell the RBNZ could cut its overnight rate into negative territory.

The AUD has for 3 weeks now been the star performer in the G10, the question we ask is why?

Yes, we have seen the largest Australian government stimulus package in history coupled with the most accommodative central bank policy setting in the history of Australia which is likely to have ‘backstopped’ the collapse seen in late-March when AUD/USD hit $0.58. The rise over the past 20 plus days suggests the market is basically banking on the idea that Australia will be spared the worst of the economic fallout from the COVID-19 crisis.

I am not so sure. Australia’s GDP is getting smashed, if you look at the consumption component and particularly service consumptions its getting a double hit, first from the wildfire in January, then COVID-19 restrictions through February on Chinese tourist then the full lockdown saw this sub-sector just ‘stop’. Consumption makes up 55% of Australian GDP.

Wages were patchy pre-COVID, but with the Australian Government releasing the welfare data last week one can calculate where the unemployment rate currently stands and that is 10.8%, wage growth will and has declined which in turn weighs on other areas of consumption.

Finally, housing which was modest in its movement during April but is showing weakness entering the second quarter, suggesting a decline throughout 2020 is likely and that will, in turn, hit the wealth effect in the Australian economy.

So again the AUD at $0.65 looks stretched.

We should also point out that iron ore is beginning to weaken on signs of increased supply not just from Australia but also Brazil. A measure of the 20-day exports from Australia and Brazil is up 10% year on year and has seen Dalian futures closed at a 2-week low of US$81.70 a tonne a trend that is likely to continue in the coming months.

Now there are two sides to currencies, and I should point out that US data has smashed by COVID-19 and the US too is stimulating its economy at unprecedented levels. Last week the Richmond Fed April manufacturing PMI falling to -53 a new record low a 55- point drop from the prior month of +2. It’s even worse when you dig into the details: New orders collapsed to -61 from 0 shipments fell to -70 from +13 which cause inventories to rise to 30 from 14. We also saw the US March trade balance fell to -US$64.2 billion as exports declined -6.7% month on month with imports down -2.4% month on month. Then the ever-mounting dole lines increased by a further 3.4 million meaning over 30 million US worker are now unemployed.

But, AUD is a risk currency and the way it is trading suggests a V-shaped recovery is the most likely scenario, I just can’t see it in the current economic climate and remain cautious of this view. I suspect the USD will take preference sooner rather than later over its riskier peer.