AUD – A$

Weak Bullish– Australia’s monetary policy outlook, developments surrounding the overall risk outlook and the country’s domestic situation regarding the coronavirus are the primary drivers of AUD.

Although Australia had initially managed its domestic outbreak of the coronavirus effectively, the country is now in the early stages of a second wave with July 17th reporting 425 new cases – its fourthever highest single daily increase. Australia’s ability to contain the spread before it incurs significant economic cost will be critical for AUD’s fundamental outlook.

“…with most developed economies continuing to reopen and policymakers continuing to increase stimulus, risks to the overall risk outlook are still leaning to the upside.

As a high-beta currency, AUD has benefited from the market’s improving risk outlook over recent months 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 the risk that Australia fails to contain its second wave of the coronavirus. However, with most developed economies continuing to reopen and policymakers continuing to increase stimulus, risks to the overall risk outlook are still leaning 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 – C$

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 months, with a high of $41.59 per barrel on June 23rd – WTI’s highest level since early March.

Alongside the recovery in oil prices, given CAD’S high-beta status, the currency has also benefited from the improvement in the overall risk tone of recent weeks 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. This has became particularly clear over recent weeks with WTI largely moving sideways around $40.00 per barrel. There also remains significant risks to the market’s overall risk outlook, most notably US/China tensions, and the growing focus on second wave coronavirus risks, particularly with the US now suffering a second wave and many other countries at risk.

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

CHF – 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 many of Europe’s worst-hit countries, namely Spain, Italy and France continuing to see a steady slowdown in the number of new infections.

Expectations for a €750 billion recovery fund had added to Europe’s improving outlook.

Expectations for a €750 billion recovery fund had added to Europe’s improving outlook; however, at the time of writing, there still remains no breakthrough from the July 17/18th EU summit with reports stating that the ‘frugal four’ – Austria, Denmark, Sweden and the Netherlands – appear no more willing to back down from demands for cuts to the package and saw France’s Macron and Germany’s Merkel leave talks early.

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; although as Brexit negotiations take place throughout July, Brexit is arguably the more significant at present.

Beginning with the coronavirus, the number of cases in the UK stands at 294,066 – the tenth highest in the world. Daily infections have been steadily dropping; however, risks of a second wave are high with social distancing measures eased as the economy begins to reopen.

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 a record-high £745 billion.

Turning to 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 two weeks of negotiations in early July, both UK and EU officials continue to state that no significant progress has been made and significant differences remain. If no deal has been reached by the end of the month, no-deal Brexit risks will significantly increase.

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 remains 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 – $

Neutral – 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 June meeting, the RBNZ left its Official Cash Rate unchanged at 0.25% and their large scale asset purchase (LSAP) programme unchanged at NZ$60 billion. However, the central bank stressed the likelihood of further easing in the future. This will undoubtedly take the form of additional QE – a necessary requirement to maintain its current efforts – but also in the form of further unconventional measures with the central bank itself stating that additional QE is unlikely to be enough. As such, expectations for the central bank to eventually turn to negative interest rate policy remain strong.

Although significant and new risks remain – and the potential for negative rates is certainly a detrimental factor – NZD continues to benefit from the material shift in the market’s risk outlook over recent weeks. However, this area is also seeing increasing risks as second wave coronavirus fears continue to grow; a factor which poses downside risks to NZD given its high-beta status. As such, given downside risks through monetary policy and until there is further clarity over second wave coronavirus fears, and whether the market can maintain its overall positive risk outlook, we hold a neutral fundamental bias for NZD.

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.

This development, combined with the current supply of USD, suggests the currency is likely to come under increasing pressure.

With the market now moving back out of safe-havens and into riskier assets, demand for USD as a safehaven 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. Additionally, even if the risk outlook sours, recent reports suggest USD is becoming less favourable as a safe-haven due to the US’ second wave of the coronavirus and increasing political risks given this year’s US elections.

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 fundamental bias for USD.

Guilherme D’Orey

FX Derivatives Sales Trader
gdorey@tvmarkets.com

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