Australian Dollar "Best Commodity Currency for a Recovery" says ING

- AUD rides the global recovery higher
- Markets blind to -ve data
- RBA restraint on quantitative easing another +ve for AUD outlook
- AUD best placed to ride global recovery

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The Australian Dollar continues to ride the global market recovery story, with investors looking through dire economic data and looking forward to a virus-free and unlocked global economy.

The Australian Dollar retains a high positive correlation to risk, rising when markets rise but falling when they enter a decline, confirming by the currency's recovery alongside a global equity rally that is now six weeks old.

The return of positive sentiment leaves the Australian Dollar up by 9.0% against the Euro over the course of April, up 7.0% against the Pound and up 7.6% against the U.S. Dollar.

While this leaves analysts at one Australian investment bank warning the currency is now overvalued, it is likely that the immediate outlook for the currency remains closely aligned to broader market trends.

"Risk On - Risk Off (RORO) has been the dominant driver of FX, its current grip on the market even tighter than seen during the global financial crisis. Currencies are being driven by the vagaries of risk appetite," says David Bloom, Global Head of FX Research at HSBC.

The Aussie currency and stock markets have rallied in asserted fashion over the course of the past 24 hours, with the release of the worst quarterly GDP data out of the U.S. since 2008 having almost no negative impact on sentiment.

"Investors should know the script by now. This is a market that ignores or rides out bad news and focuses on the good data, no matter how limited that might be. This was perfectly demonstrated this afternoon when US GDP for the first quarter was published – despite being worse than expected US futures held their ground, and then were given a significant boost on news that Gilead’s remdesivir trial was making further progress. This has come soon after reports that Oxford University’s vaccine was also bearing fruit, raising hopes that the end of lockdowns in time for the summer might be followed up by medical progress that allows the world to move back towards its pre-virus normality," says Chris Beauchamp, Chief Market Analyst at IG.

The Pound-to-Australian Dollar exchange rate fell to a new 14-week low at 1.9018 amidst the Aussie Dollar's latest bout of appreciation. The Euro-to-Australian Dollar exchange rate fell to a nine-week low at 1.66 while the Australian-to-U.S. Dollar exchange rate rallied to a seven-week high at 0.6532.

"In Australia, where the number of new daily virus cases has fallen to below 50 over the past week, the government is taking only small steps in removing the lockdown measures. Nevertheless, the local Dollar has rallied to a more than 6-week high on hopes that Australia can avoid a sharp economic contraction," says Raffi Boyadjian, Senior Investment Analyst at XM.com.

The rally is expected by foreign exchange strategists to extend, provided the current trend of improvement in global sentiment and a global march towards the covid-19 lockdown exit door continues apace.

Analysts at ING Bank N.V. say the Australian Dollar can be considered the "best commodity currency for a recovery".

"Despite the adoption of QE last month, the AUD has staged a strong recovery," says Chris Turner, Global Head of Markets and Regional Head of Research for UK & CEE at ING. "A very strong response to the Covid-19 pandemic, has led new cases to flatten off impressively. The economic response to the pandemic has been very strong, with one of the biggest onbudget responses anywhere.

Turner says that contrary to the outlook downgrade by S&P, Australia’s post-Covid-19 outlook is probably one of the strongest anywhere and this can allow the Australian Dollar "to lead the recovery in G10 procyclical currencies."

The Reserve Bank of Australia (RBA) cut interest rates to record lows at 0.25% last month and introduced a programme of quantitative easing to beat off the negative economic effects of the coronavirus. Typically such moves expand the money supply in the economy which in turn can contribute to a lowering of the domestic currency.

However, Elias Haddad, Strategist at Commonwealth Bank of Australia (CBA) points out that the RBA has been relatively restrained thus far, and in a world awash with new money this restraint could actually play positive for AUD.

:AUD/USD edged up to a high near 0.6550 supported by improving financial market sentiment. Today, the RBA purchased A$1bn in semi‑government bonds, taking total purchases since QE started on 20 March to A$50.3bn. But the pace of RBA bond purchases is slowing which is AUD supportive," says Haddad.

CBA say RBA bond purchases totalled A$2.5bn last week down from A$4.7, A$7.5 and A$13bn the previous weeks, respectively. This week’s efforts by the RBA is on track to average a total of around A$1.5‑2.0bn.

"AUD faces more near‑term upside risk against most major currencies," says Haddad.