The Australian and New Zealand dollar currencies have been the best performing majors in recent days. Each has gained nine-tenths of a cent against the US dollar since Thursday, with appreciation fuelled by the market’s upbeat mood towards a potential US-China trade agreement.
A trade agreement between the US and China is “very, very close,” President Donald Trump said on Monday. As a result, the risk-sensitive Australian dollar and New Zealand dollar rose to respective levels just shy of US72¢ and US69¢.
Together with Brexit, trade tensions between the world’s two largest economies have dominated business headlines over much of the past year, threatening as they do the economies of smaller, export-dependent countries across the globe. In 2018, both the US and China applied tariffs on goods coming from the other worth hundreds of billions of dollars, and more tariffs have been threatened for March-1.
Trump’s beginning-of-week optimism on the matter has been more than enough to force a move to “risk on,” sending higher-yielding and riskier currencies up and safe havens down.
For the Australian dollar, though, developments on trade offer much more than just a play on market sentiment. China is by far the largest buyer of Australian commodities and any and all factors that strengthen the Asian giant’s economic health are welcomed by Australians with open arms.
It makes sense that the Aussie is now more or less back where it tumbled from on Thursday following rumours, which Beijing later denied, that China had banned Australian coal imports. Given the New Zealand dollar’s high correlation to the Australian dollar, it has been unsurprising to see that thrive too.
Upside for the antipodes should, however, be limited given ever-increasing odds of interest rate cuts.
Though the RBNZ said 2 weeks ago that it would keep interest rates at “this level through 2019 and 2020,” many analysts are skeptical. In Australia, markets have nearly fully priced in a rate cut by early next year and those still standing by earlier Australian economic and interest rate outlooks admit that they do so by the skin of their teeth. “It would not take much for us to put rate cuts into our profile,” Nomura economist Andrew Ticehurst said on Monday.
One prominent forecaster getting especially downbeat on the Aussie dollar is HSBC, which recently slashed its year-end estimate to just US66¢—a valuation not seen for a decade.
As for the Chinese yuan, that rose on Monday to a 7-month high of ¥6.677 per US dollar; it is now 1 jiao (10 fen) stronger than its weakest point on February-12.
As alluded to above, one major currency not enjoying itself of late is the Japanese yen—the FX world’s numero uno safe haven.
The yen weakened on Monday to a 2-month low against both the US and New Zealand dollars, at respective rates of ¥111.20 and ¥76.5; it fell to an 8-week low of ¥126.3 against the euro and to ¥79.7 against the Australian dollar.
The threat of a proxy war between the US and Iran in Iraq has pared back some of the recent gains of “risk-on” currencies.
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