The risk momentum is not only accelerating its starting to really peak out.
Equity sentiment has seen the Australian market have its best week since 2011 to finish May while US markets breached all sort of technical and psychological levels with the S&P 500 crossing 3000 points for the first time since this crisis began and closing above the 200-DMA, the NASDAQ got within 2.5% of its all-time high (also its pre-COVID high) before the President went after social media companies and the DOW jumped across the 200-DMA as US banks surged.
The risk sentiment is also driving FX – DXY is under pressure it hasn’t seen since the crisis began and the 1.0% fall last Tuesday broke any form of hope the bulls had of holding above 100. DXY has now fallen 3.86% since its peak on March 19. The underperformance is most acute in risk pairs.
EUR/USD continues to trade in sharp up-down movements making it a touch hard to get a strong read on. However, the pattern shows the up movements tend to be stronger than the down meaning the net effect is the part is now pushing through $1.10 a psychological level that might see buying up to $1.12.
GBP/USD, the pair continues to rally despite the dire situation the UK finds itself in. The $1.24 resistance level will likely be tested in the coming week after the Bank of England’s chief economist Haldane stated that the prospect of negative rates from the bank was, ‘not likely near term’. Takes the ‘caveat’ we have been discussing out of the market in the short term.
However, as mentioned risk-on sentiment is even more prevalent in the commodity currencies, with the Aussie Kiwi and NOK now the best performing G10 currencies of the past week with the AUD the standout.
We need to drill into this performance a little deeper to see if it’s sustainable. The pair is hot, and its sustainability is the fundamental question.
Here are a few points that suggest it just might be:
- Strong domestic fiscal stimulus coupled with a steepening yield curve (RBA hasn’t touched the 3-year for over 3 weeks) this under theory should be a support for the AUD as interest rate differentials have started widen, the Aussie-US 10 spread is back in the positive for the first time in over 2 years.
- It appears there will be a smaller impact to the Australian employment markets versus the US in particular which again feeds into those higher rates in Australia, versus the US.
- Clear rebound in commodity prices which is being fuelled by improving economic conditions in Asia coupled with stimulus out of China.
- Fair value calculations suggest the AUD is trading at an approximate 10% discount based on PPP.
There are risks with these views and any signs the growth recovery is slowing or the simmering geopolitical tensions spill over – safe-haven currencies would come to the fore at the expense of the AUD.