Aussie dollar's vaccine jolt

Sean Callow

Westpac Bank

Global equities wobbled on Thursday but overall it is looking increasingly as though markets didn’t really need a ‘blue wave’ US election after all. The MSCI World equity index hit a record high on Wednesday, emerging market currencies have jumped over the past week and in the G10, commodity currencies and sterling are strongest, while safe havens Japanese yen and Swiss franc are weakest.

Equities found unexpected fuel from a very encouraging vaccine trial. The main equity index of tourism-sensitive Spain surged 8.6% on Monday. US stocks only closed up 1.2% on the same day and a degree of caution does seem warranted, with top US health official Dr Anthony Fauci noting the distribution challenges of this particular vaccine which needs to be kept at minus 70 degrees.

Even after Thursday’s decline, the S&P 500 is up 8.2% so far this month. But we continue to be concerned about the prospect of only limited fiscal support for the US economy being agreed without the Democratic control of the Senate the ‘blue wave’ would have delivered.

Senate Majority Leader McConnell this week said aid should be highly targeted. Unless Democrats win both Georgia Senate runoff elections on January 5th, the Biden administration will be very constrained on fiscal policy.

Still, the resilience of global equities seems telling. Major central banks are on track to buy plenty more bonds with newly created money, so equities will continue to benefit from the comparison with extremely low bond yields.

The pace of RBA balance sheet expansion is set to play catch-up with other major central banks. But with Asia-Pacific growth prospects a starkly positive contrast with the US and Europe on Covid-19, the RBA’s monetary loosening may not cause much damage to the Australian dollar.

Indeed the Aussie seems to have plenty going for it. Westpac’s Australian consumer sentiment index rose a further 2.5% in November, boosted by an understandable 9% surge in Victoria as new coronavirus cases fell to zero. The national index is now at a 7 year high. This seems excessive but Westpac data on Australian credit and debit card spending does show consumer spending on discretionary items bounced at the start of this month.

Victoria will have plenty of pent-up demand and with new virus cases very low or zero throughout Australia and borders opening further, there is scope for a strong run into Christmas. How much this should support the Aussie dollar is open to debate, with the RBA’s new policy stance aimed at lowering interest rates and with international borders still effectively closed, crushing tourism and education revenue.

There could also be some negative domestic data in the week ahead. On Wednesday, Q3 wages growth is likely to be very slow. And on Thursday, we expect Australia’s October labour force survey to show a further 30,000 fall in jobs and a rise in the unemployment rate to 7.2%. The other key event is a speech by RBA Governor Lowe on Monday.

Overseas, the calendar includes China’s October activity data. Industrial production has rebounded sharply, helping the iron ore price return to above $120 per tonne this week. This underpins Australia’s trade surplus, at least for the time being. 

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Sean Callow
Sean Callow
Senior Currency Strategist
Westpac Bank

Sean Callow is Westpac Bank's Senior Currency Strategist, based in Sydney. Sean focuses on the Australian dollar and other G10 and Asian currencies. He has worked in strategy and economics roles in New York, London, Singapore and Melbourne.

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