The A$ is riding higher again, establishing itself above US74c this week. The A$ has now gained US4 cents in the month since the RBA delivered their big stimulus package. Further gains are likely into 2021 if we see a dovish Fed pivot in December and as vaccine deployment feeds optimism on global recovery prospects.
The A$ is riding higher again, establishing itself above US74c this week. The A$ has now gained US4 cents in the month since the RBA delivered their big stimulus package.
But the RBA likely isn’t flustered. A$ gains lately have been more about broad US$ weakness. The euro, the kiwi, the Canadian dollar, China’s offshore yuan and the Korean won reached two-year plus highs against the US$ this week too. If anything, A$ has been lagging global peers lately – the trade weighted index is still a good 2% below its August 2020 highs despite 2 ½ year highs for A$/US$.
The US$ has been breaking lower amid another very buoyant week for global markets, reflecting renewed optimism over Washington Covid relief talks, stronger Chinese activity PMIs, firming vaccine rollout plans, eleventh-hour Brexit deal hopes and the passing of US election uncertainty.
The deployment of vaccines next year and continued reflationary fiscal and monetary policies across the globe set the stage for a global business cycle upswing that will maintain pressure on the US$.
US$ weakness needs to be viewed in the context of a considerable loss yield appeal in the last couple years too. In late 2018 US 2-year bond yields were trading around 300bp above G10 peers. That yield advantage has been trimmed to a negligible 50bp in 2020. Admittedly, interest rate differentials have not been behind the US$’s latest leg lower, but they are an important background medium term fundamental consideration. The Fed’s mid-December meeting is likely to underscore the message.
Vaccine rollout plans and renewed Covid aid package hopes argue against a dovish Fed pivot, but the labour market cannot wait long enough. The number of US cities and municipalities reinstituting suppression measures continues to grow and the immediate US growth outlook is under a cloud. That argues for a dovish Fed in a couple weeks and continued pressure on the US$.
The race to vaccinate has started. Shots will be dispensed in the UK in a matter of days following Pfizer’s early UK approval. The US is not far behind. The FDA meets 10th December to discuss Pfizer’s vaccine and a week later to discuss Moderna’s vaccine. Emergency use authorisation could see vaccines deployed within a week.
But there will be setbacks. Pfizer and BioNTech had been expecting deliver 100 million doses worldwide by year’s end, enough to vaccinate 50 million people. But those plans have now been cut in half due to raw material supply bottlenecks. The US and the UK had been planning to have enough doses to vaccinate 6% and 8% of their populations respectively by year’s end and 25%-30% of their populations by March 2021, but that is now unlikely. The company still expects to deliver 1.3bn vaccine doses in 2021 though.
The EU, Japan, Australia, Canada and New Zealand are on slower timelines and Pfizer’s delay will not have any meaningful impact. Regulatory approval in these places is likely to come in early 2021 and vaccination is expected to begin around March 2021.
Local news for the A$ has been mixed. Australia’s strained relations with China hit a new low this week. On current trends China seems more likely than not to impose further import restrictions.
But on the plus side, Australia’s Q3 GDP rose a stronger than expected 3.3%, driven mainly by a reopening-led rebound in household spending.
Further gains for the A$ are likely into 2021 if we see a dovish Fed pivot in December and as vaccine deployment feeds optimism on global recovery prospects.
Event risk
RBA Gov Lowe speaks, China Nov trade balance (Mon), Aust Nov NAB business confidence, Aust Q3 house prices, Germany Dec ZEW survey (Tue), Aust Dec Westpac consumer sentiment, China Nov CPI, Bank of Canada policy decision (Wed), ECB policy decision, US Nov CPI (Thu)
