Despite the many challenges of the year, the Australian dollar has made gains against other currencies. The pandemic has changed the focus of the FX market - and while economic performance and central bank policies remain important, they are seen through the lens of lockdown and recovery. Currencies fluctuate in relation to each other and it’s one of the reasons the Australian dollar has managed to make gains despite ongoing challenges preventing the spread of Covid-19.
China: the canary in the coal mine
The virus first emerged in China, which means that the country has been ahead of other countries in terms of locking down and reopening. While this means that China became the focus of early warnings of what was to come, it is now the focus of signs of recovery. A recent rebound in economic activity in China proved positive for the Aussie as a commodity based currency. An increase in manufacturing and trade from China has meant an increase in demand for oil, iron ore and other commodities. If the recovery can be sustained, this may light the way for other countries across the world to follow suit – however the ongoing and escalating Tariff war that China has on Australia could prove to be the stumbling block.
UK and Europe wavering
The situation in the UK and Europe is less clear, and this has meant more volatility in the Pound and the Euro. Severe lockdowns across Europe appeared to have had the desired effect in terms of eradicating the virus, but came at a high cost for the economy. The ECB stepped in with an historic recovery package and there are some signs that the economy is picking up, but a recent resurgence in coronavirus cases is putting that recovery into doubt. In the UK, cases of the virus are slowly declining and economic activity is picking up, but sterling is being harried by the spectre of Brexit. The departure deadline at the end of the year is looming large as the UK and the EU continue to disagree on the terms of the final agreement, which means that the pound is likely to be under pressure for some time.
US dollar loses its shine
After a prolonged period of strength, the US dollar has been struggling in recent months, weakening against a basket of currencies as it appeared that the US had not taken stringent enough measures to get the virus under control, which had a knock on effect on the economy. Coupled with this is the looming election in November 2020, and the political uncertainty alongside the current economic travails and health concerns finally put an end to the greenback’s unchecked progress.
The currency markets are likely to remain volatile as long as uncertainty reigns across the world. While investors are becoming inured to the economic impact of the pandemic in Q2, they are looking for signs of recovery as we move into the autumn. The pandemic isn’t the only issue; New Zealand, for example, was praised for its effective early lockdown, but it came at the cost of a closure of borders and dramatic reduction in trade and tourism and it cannot remain in limbo indefinitely without decimating the economy. Cases across Europe are rising once more, denting already fragile confidence and localised lockdowns across the world are having an impact on local and national economies. While it’s impossible to predict what lies ahead for the rest of the year, what is likely is that while the uncertainty persists, the currency market is likely to be volatile and currency values could fluctuate significantly.
Moneycorp is a reference to TTT Moneycorp Pty Limited which is registered in Australia (business number 116612858). Its principal place of business is Level 15 Exchange Tower, 2 The Esplanade, Perth WA 6000, Australia. TTT Moneycorp Pty Limited is authorised to deal in foreign exchange contracts and buy/sell quotes to retail and wholesale clients as an Authorised Representative (reference number 445555) of Rochford Capital Pty Limited (AFSL License No. 361276).