Fundamental Currency Analysis

Contents

AUD

Weak Bullish– Australia’s monetary policy outlook and developments surrounding the overall risk outlook are the primary drivers of AUD. Australia has been managing its domestic outbreak of the coronavirus effectively with the country suffering far less cases than most advanced economies – just 7,320 cases at the time of writing – while also continuing to ease lockdown restrictions with no sign of a resurgence in infections.

Furthermore, as a high-beta currency, AUD has benefited from the market’s improving risk outlook over recent weeks as participants moved out of safe-havens and into riskier, higher-yielding assets. Risks still remain, with the most notable being US/China tensions, Australia/China tensions and risks of a second wave of the coronavirus in many countries, particularly the US. However, with economies continuing to reopen and policymakers continuing to increase stimulus, risks are beginning to lean to the upside.

Consequently, with the market seeing a material improvement in its risk outlook, the fundamental bias for AUD is leaning more bullish than bearish; however, as there remains many risks surrounding the coronavirus, global economic outlook and ongoing tensions between Australia and China, we hold only a weak bullish bias for now.

CAD

Weak Bullish – The outlook for CAD has been improving over recent weeks, largely due to the recovery in oil prices and the improving risk outlook of the market. From its historic low of -$40.30 on April 20th, WTI has seen an unprecedented recovery over recent weeks, with the first week in June seeing the market close above $39.00 per barrel – WTI’s highest level since early March.

Alongside the recovery in oil prices, given CAD’S high-beta status, the currency has also benefiting from the improvement in the overall risk tone as market participants focused on economies lifting lockdown restrictions while also increasing stimulus. Risks still remain for CAD. With WTI once again at pre-lockdown prices, further gains for the commodity are likely to be more of an uphill battle. There also remains significant risks to the market’s overall risk outlook, most notably US/China tensions, the risk of a rebound in coronavirus cases and the fact that many economies are set to suffer their greatest economic slowdowns on record.

As such, while the outlook for CAD has certainly improved, due to the potential risks, we hold a weak bullish fundamental bias.

CHF

Weak Bearish – As a safe-haven currency, the market’s risk outlook is the primary driver of CHF. Swiss economic data rarely proves market moving; and although SNB intervention can have a substantial impact on CHF, it’s impact tends to be relatively short-lived. Additionally, the SNB are unlikely to adjust policy in the near future, given their overall neutral tone and a lack of meaningful developments regarding economic data.

The market’s overall risk tone has improved over recent weeks with economies continuing to lift lockdown restrictions while policymakers continue to ease. Consequently, market participants have continued to move out of safe-havens and into riskier, higher-yielding assets which in turn has reduced the demand for safe-haven currencies such as CHF.

Of course, significant risks to the markets risk outlook remain with US/China tensions and the coronavirus still posing significant threats to the global economic outlook and markets. As such, we now hold a weak bearish fundamental bias for CHF.

EUR

Neutral – Government measures for handling the coronavirus outbreak in Europe appear to be working, with Europe’s worst-hit countries – Spain, Italy, France, and Germany – continuing to see a steady slowdown in the number of new infections. Additionally, expectations for a €750 billion recovery fund have further added to Europe’s improving outlook; although the fund is still far from a done deal with strong opposition from Austria, Sweden, Norway, and Denmark.

Furthermore, the ECB’s surprise €600 billion increase in its Pandemic Emergency Purchase Programme (PEPP) to a total of €1.35 trillion has further added to the improving outlook.

All-in-all, Europe’s steady improvement in its coronavirus outlook and expectations for a speedier recovery than initially thought has removed most of EUR’s bearish factors. However, with that being said, the EU’s economic outlook remains far from certain with the economy still expected to suffer an unprecedented contraction. As such, we currently hold a neutral fundamental outlook for EUR until its economic outlook becomes more clear.

GBP

Very Bearish – The focus for GBP has become split between the coronavirus outbreak and

Brexit; with the former currently the more pressing issue.

“BoE have announced emergency measures with the government setting aside £7 billion in its annual budget”

At the time of writing, the number of cases in the UK stands at 295,889 – the fifth highest in the world. In response to the outbreak, both the government and the BoE have announced emergency measures with the government setting aside £7 billion in its annual budget for the outbreak and announcing additional measures since, including £330 billion in guaranteed business loans.

Regarding the BoE, after two emergency rate cuts and an increase in its QE programme, the Official Bank Rate stands at a historic low of just 0.1% (and could turn negative in the months ahead) while bond purchases have been increased to £645 billion and are expected to increase by an additional £100 billion at this week’s meeting.

Regarding Brexit, the UK still has until just December to determine its future relationship with the EU, including its trade agreement, freedom of movement and security co-operation. After their June negotiations, both UK and EU officials reported that once again, no significant progress was made.

With both Brexit and the coronavirus posing significant risks to the UK’s economy in both the immediate future and its long-term outlook, the fundamental bias for GBP is very bearish.

JPY

Weak Bearish – As a safe-haven currency, the market’s risk outlook is the primary driver of JPY.

Economic data rarely proves market moving; and although monetary policy expectations can prove highly market-moving in the short-term, safe-haven flows are typically the more dominant factor, especially in the current environment given the ongoing coronavirus outbreak and global economic slowdown.

The market’s overall risk tone has improved over recent weeks as governments and central banks continue to announce supportive measures and many major economies continue easing lockdown restrictions.

As such, participants have continued unwinding safe-haven positions to move capital into riskier, higher-yielding assets.

Consequently, with participants now moving out of safe-havens, JPY’s fundamental bias has been downgraded to weak bearish.

NZD

Weak Bullish – Like most currencies, the primary driver for NZD over recent weeks has shifted to the coronavirus outbreak and the overall risk tone; although monetary policy remains highly influential too.

At their May meeting, the RBNZ left its Official Cash Rate unchanged at 0.25% but stated they have told banks to be operationally ready for negative rates by year-end as the central bank aims for a ‘least regrets’ monetary policy response to the coronavirus pandemic by delivering as much stimulus as possible as soon as possible. Additionally, as expected, the central bank increased its large scale asset purchase (LSAP) programme to NZ$60 billion from NZ$33 billion, stating it was the ‘most effective way’ to deliver stimulus at this time. Although significant and new risks remain – and the potential for negative rates is certainly a detrimental factor for NZD – the market’s greater focus on economies lifting lockdown restrictions and ongoing supportive measures from policymakers has resulted in a material improvement in the overall risk outlook. Given its high-beta status, NZD has notably strengthened and benefited from the improving risk tone, result in a weak bullish fundamental bias for the currency.

USD

Bearish – The primary driver of USD over recent months has been demand for cash as uncertainty and panic over the coronavirus outbreak resulted in a rush for cash with USD once again claiming the title as the ‘ultimate’ safe-haven. Since the coronavirus outbreak and rush for cash; however, the Fed has announced unprecedented measures such as an unlimited QE programme (although this has now formalised at approximately $80 billion in treasuries per month and $40 billion in MBS per month) while also opening swap lines to an additional nine central banks, resulting in a flood of dollars into the market.

With the market now moving back out of safe-havens and into riskier assets, demand for USD as a safe-haven is notably falling. This development, combined with the current supply of USD, suggests the currency is likely to come under increasing pressure if the overall risk outlook continues to improve.

All-in-all, with demand for USD as a safe-haven falling, the Fed’s ultra-loose monetary policy stance and the US remaining the worst hit country from the coronavirus, we hold a bearish bias for USD.

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