Searching for Drivers, Winners and Losers

The two main factors that drive currencies are interest rates and growth but rates are now zeroed out and growth is contracting everywhere. That's left the FX market decidedly uncertain. The risk trade and politics are short-term drivers but have failed to spark any lasting trends. The Australian dollar might be a hint of where the market is looking next. AUD is leading today's rally vs USD after 2 territories (states) announced they will ease social distancing restrictions. Gold and oil push lower, with US Crude hitting a 5-day low at $11.88 as excess supply becomes too great of a reality for producers mulling any further cuts.

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Elsewhere, US Treasury Secretary Mnuchin said that “over time” the US will need to look into dealing with the surge in budget deficits created by the multi-trillion- dollar stimulus packages. The statement is a reminder of the deteriorating debt situation at the US Federal level at a time, when foreign purchases of US securities have continues to decline.

By the usual playbook, the Australian dollar is a terrible place to be right now. It's a classic growth-sensitive currency that's highly reliant on exports. Yet since the chart bottomed on March 18 at 0.5506, it's shown few signs of looking back. It's steadily climbed to 0.6445 in mid-April and is now a half-cent away from that high. It's also only 200 pips from mid-February levels.

The case for owning AUD is that internal domestic growth could leave the country in a stronger position than elsewhere because the economy could realistically reopen. The number of Coronavirus cases have been minimal in Australia and New Zealand, explaining why both nations are discussing plans to winding back restrictions sooner than anticipated. Given the lack of land borders for either country, they could realistically operate at nearly full-speed in the weeks ahead. Of course, the demand for antipodean exports is severely hampered but that may still be a much better picture than elsewhere in the world.

Rises in AUD and NZD would undoubtedly be pain trades in the FX market but in a world without interest rate differentials and export growth, a country that can operate decently-well in a bubble begins to look pretty good. That doesn't follow the classic rules but it's time for outside-the-box thinking.

If it continues, it will be an early sign that the real driver in FX markets for the remainder of the year will be how countries handle the virus.

CFTC Commitments of Traders

EUR +87K vs +87K prior GBP -1K vs +3K prior JPY +26K vs +22K prior CHF +5K vs +5K prior CAD -24K vs -24K prior AUD -35K vs -36K prior NZD -14K vs -15K prior