AUD/USD, NZD/USD, USD/CAD: The factors moving commodity currencies after the dust has settled

China has always had an outsized impact on commodities that it consumers and on commodity currencies. As the world is learning to live with coronavirus, how much influence does the world's second-largest economy have on them? Does the US, the world's first, have a more significant impact? What about domestic developments? Valeria Bednarik, Joseph Trevisani, and Yohay Elam discuss the next moves.

Yohay Elam: China is the world's second-largest economy, a frenemy of many countries, and undoubtedly influential. The latest significant market-moving news came from Beijing's encouraging of a bullish stock market. The trick seemed to work, contributing to the recent leg up in global stocks

Joseph Trevisani: Yes. Their takeover of HK has gone almost unmarked in the rest of the world. Beijing is astute and choosing the moment well

Valeria Bednarik: Not to mention that China holds more than $1 trillion in US debt every year for the past ten years. And yeah, it may have contributed to the recent run, but hey, COVID-19 is a huge stone in investors' shoes

Yohay Elam: China certainly took advantage of the virus to move against Hong Kong

Valeria Bednarik: European equities pretty much trimmed Monday gains

Yohay Elam: Today, the Chinese press called for some rationality

Valeria Bednarik: China takes advantage of everything...

Yohay Elam: Not all the moves can be attributed to Beijing of course

Joseph Trevisani: True. I have always thought that China's US debt holding is no threat. Beijing can do little with them except hold

Yohay Elam: Indeed, China is bullying smaller western countries

Joseph Trevisani: Yes, the controlled press in China asks for rationality after HK is subdued

Valeria Bednarik: The pandemic revived an old issue that the market didn’t use to pay attention, the Australian commercial relationship with China. When Australia supported an investigation over the origins of COVID-19 and the country’s responsibility for the pandemic spread, China answered by imposing tariffs on Australian barley while banning beef from some Australian firms. Tensions mount between the two countries

Yohay Elam: Yep, arbitrary implementation of rules. Each time Sino-Australian tensions rose, AUD/USD suffered a bit

Valeria Bednarik: Yups, and while Australian policymakers said the economic downturn was not as bad as initially estimated, these tensions with China may well result in a steeper setback

Joseph Trevisani: Yes, in that relationship, China may have the upper hand

Yohay Elam: Slightly bigger country

Joseph Trevisani: There is no other obvious client for Aussie raw materials since the West has outsourced so much heavy manufacturing to China

Yohay Elam: Australia escaped a recession for nearly 30 years but became too reliant

Joseph Trevisani: Still, China is vulnerable to the removal of manufacturing to other locations, somewhat vulnerable, but do in so is harder than it looks

Yohay Elam: Nevertheless, AUD/USD is still on high ground despite tensions with China and today's announcement that Melbourne is entering lockdown

Joseph Trevisani: Australia's recession-free generation coincides exactly with China's economic rise, and that is no coincidence

Valeria Bednarik: China has been already preparing for this, building tights with Latin American countries

Joseph Trevisani: And looking and funding resource development in Africa

Valeria Bednarik: Aussie strength seems more correlated to the fact that the country had the virus "controlled" at least until the last weekend. The country reopened much sooner than others, and as said, RBA members were cautiously optimistic. That said, and with the just-announced Melbourne lockdown, I fear the Aussie could soon change course

Yohay Elam: AUD/USD suffered a more significant dip today, let's see if it is a game-changer. Crossing over to New Zealand, they certainly have the virus under control. Will we see the ever-elusive AUD/NZD parity? or is New Zealand also highly dependent on China and the global stock sentiment?

Joseph Trevisani: NZ is an interesting case. The cost is isolation, at least until a vaccine is found.  but so far at least it hasn't affected the currency

Yohay Elam:

 

Valeria Bednarik: From a technical perspective, parity could be reached, but doesn't seem it could be long-lasting. Fundamentally, New Zealand is an island in more than a physical optic. Of course, it depends on its neighbors to trade, but as Joseply said, the currency seems much more resilient to external factors

Yohay Elam: Two islands, fewer than five million humans, dozens of millions of cows and sheep

Joseph Trevisani: Except for the dollar safety impact in the early days of the COVID, the pandemic has not had any specific differential currency impact

Valeria Bednarik: Indeed, but is responsible for the intraday sentiment-related swings, and had an impact on stocks

Yohay Elam: I have visited New Zealand as a tourist. It is a gorgeous country that draws many tourists. That sector has suffered but agricultural exports continue rolling out. Indeed, no specific differential impact

Joseph Trevisani: I used to run the Tokyo desk for Credit Suisse. Auckland and Sydney were the first markets, wild markets. If there was a stop anywhere within 100 points they would find it

Yohay Elam: March 15, the Ides of March, was an example of how markets in the South Pacific went wild, it's when Powell made his dramatic cut to zero move

Joseph Trevisani: The question now is with the rising caseload derail the recovery? We don't have an answer to that yet. For the commodity currencies, it is an active question. The dollar could rise if things get worse, as it did in March, commodity pairs would get hit hard

Valeria Bednarik: I guess that if things go well in the US, they can't be too bad for commodity-linked currencies that tend to rise alongside stocks. More range trading is what I can see

Yohay Elam: I think that commodity currencies are still mostly "risk currencies," moving with the global mood, and developments in the US, good or bad, make most of the moves. The local topics come second. Relations with China, local coronavirus situation, local economic data

Valeria Bednarik: Exactly

Joseph Trevisani: That is true. One aspect is the pain and fear threshold. It is much higher than it was in February. China has more impact on commodity currencies but the web is worldwide if China produces the US and Europe buys.

Yohay Elam: AUD/USD daily chart

Joseph Trevisani: Risk acceptance all the way

Yohay Elam: AUD/USD is trading around the same levels it did early in the year, resembling S&P...

Valeria Bednarik: Yups barely 100 pips away from this year high

Yohay Elam: Here's the comparison chart

Joseph Trevisani: They are pretty much a pair

Yohay Elam: AUD/USD slipped alongside China's coronavirus crisis, and then S&P joined the falls but in the past few months, they are tightly together once again. Let us complete the commodity currency tour with Canada. Dependent on the US

Joseph Trevisani: The Loonie's improvement has yet to break to pre-pandemic levels

Valeria Bednarik: And oil...

Yohay Elam: How much is the loonie dependent on the US and how much on oil prices?

Valeria Bednarik: Oil is still a factor when it comes to CAD direction

Joseph Trevisani: I think we have to separate, though it is difficult, the dollar-safety reaction of March and April from the more mundane commodity impact which is, for now, governed by the virus. Meaning that the global economy will not take off, which it is ready to do, until it is clear the virus is history, at least threatening history

Yohay Elam: March was sheer madness, fears of a financial meltdown

Joseph Trevisani: Yes, but good trading

Yohay Elam: Indeed, high volatility that new traders hadn't seen before

Joseph Trevisani: But older (ahem) traders have seen it many times. 2008 was wild too. After a crisis the world longs and strives for normality. We are seeing that now

Valeria Bednarik: Although there's something different. Nowadays, we all know all at second. I mean, information is available at the tip of your fingers 24/7, so big news for sure have an impact and yeah madness and all that

Yohay Elam: The internet was good in 2008, now it is amazing

Valeria Bednarik: But the market prices it in and pretty much that's it. Volatility is down until the next big shock

Joseph Trevisani: Is it possible that the markets will return to normal economic comparisons even if the virus is still around? Absent the recent case increase we might already be there

Valeria Bednarik: Yeah, agree

Joseph Trevisani: The dollar might win against slower-growing economies like the EU and perhaps the UK but not against the commodity currencies. I think when we get to that lift off point, the dollar will fare differently in various pairs

Valeria Bednarik: Yep, quite "normal" when things are a mess, and for sure, the world is a big mess nowadays, with no clear light at the end of the tunnel

Joseph Trevisani: I am more optimistic. I think by year-end if not sooner we will be on a more normal trajectory. I think we get dollar lower, commodities higher, then a dollar return next year, against the euro and other 'old line' currencies, those representing old and slower economies

Valeria Bednarik: That's an optimistic scenario, possible  for sure

Yohay Elam: Hopefully there is a vaccine, efforts are certainly underway. Novavax was awarded $1.6 billion from the US government, just today's news. Lots of other efforts

Joseph Trevisani: I know. And I have not been overly correct so far. The US has recovered much faster than expected, but and it is a huge but. The virus still rules

Yohay Elam: Fauci said a vaccine may be finite, something for the pessimistic case regarding commodity currencies. So, to conclude, the primary driver commodity currencies is the global mood, risk-on/risk-off, with currency-specific developments have a minor impact

Valeria Bednarik: Yups, we all know since day one that the vaccine would take 12-18 months in the best-case scenario. And it has been six months since the Chinese outbreak, and four months since it hit the rest of the world.  We still need to wait, we know we should wait, it's just that we don't want to

Yohay Elam: Indeed, high uncertainty

Valeria Bednarik: Yes, commodity-linked currency reflect the global mood, and with this scenario,  they will continue to do so