Risk Assets continue to shrug off political angst while reacting positively to coronavirus lockdowns being eased across the globe. The sublime level of policy support makes it increasingly challenging to argue the relevance of rabble-rousers looting Target (NYSE:TGT) Stores in the US, let alone the market impacting significance of Cold War 2.0.
The RBA decision was mostly a non-event for risk markets.
The RBA held the policy rate as expected, with the still deteriorating labor markets likely deterring any possibility of a hawkish surprise even as the Australian economy recovers faster than anyone could have thought. Instead, they opted to unalter the policy stance, which is far less dovish than global peers anyway.
While holding the cash rate and the 3y ACGB yield at 0.25%, the RBA pushed back against the idea of negative rates. And at the same time, the central bank might also be sending a powerful message about the prowess of their yield curve control mechanism. Indeed, the RBA has managed to avoid amassing a sizable chunk of the ACGB market, which could be their primary benchmark for policy success.
There isn't much here to fade the persistent rally in AUD. The RBA treads a fine line between maintaining forward guidance and being slightly more upbeat on the economic outlook. Overall this should be viewed as risk-friendly in the APAC landscape given the RBA's sizable footprint across the region and likewise viewed positively for the AUD.
The impact of higher oil on FX
The impact of higher oil prices is leaving a profound effect on high-yielding and commodity-producing currencies. Persistent declines in implied US equity and rates volatility against the backdrop of higher oil prices are a powerful and sturdy combination.
A dovish RBA surprise is unlikely, which could leave AUD/USD bid. The RBA announces its latest monetary policy decision (1230 SGT) against the backdrop of an outperforming AUD, which makes it the best-performing G10 and APAC currency over the past month vs. the US dollar. Indeed, AUDUSD is now trading at levels last hit in late January, buoyed more recently by its growing correlation with the S&P 500, which is shrugging off US-China tensions. The RBA will be somewhat concerned by the fact that the currency is up 5.2% on a trade-weighted basis since the Board last convened on May 5, but unlikely to toggle rates to explicitly weaken the currency and raise the ire of the USTR.
KRW is the best-performing currency in Asia since US President Trump's press conference on China last Friday, with the most significant inflow to equities ($133.1 mn) since May 19 on Monday. But that move is unpleasantly pushing against a backdrop of weak export growth.
As for US stock markets, if markets can survive the most significant economic shock of a lifetime, the S&P 500 could probably side-step waves of looters.
That is unless, of course, this civil unrest manifest into a summer of discontent where consumers remain jaded by a post-COVID-19 hangover compounded by a White House running out of options on all front, be it domestic or foreign policy. One can only imagine what it could be like under those circumstances when the pogey runs out.