Risk Appetite Returns, Leading to AUD Strength

Risk Appetite Returns, Leading to AUD Strength

On Monday we heard the welcome news that Pfizer has seen some significant success in clinical trials of a COVID-19 vaccine. Pfizer announced that the vaccine candidate has been found to be over 90% effective in preventing COVID with only 94 confirmed cases amongst its 43,538 participants. The FTSE 100 and other global stock markets rallied sharply in response to the news, which built on the gains made following Joe Biden’s victory in the Presidential election. This lead to AUD strength, with the GBP to AUD exchange dipping back below the 1.80 interbank level before recovering, making Monday the worst time to purchase Australian dollars since late September.

Why Does Risk Sentiment Impact the Australian Dollar?

When times are good, traders (in all markets) are willing to purchase higher-yielding and/or potentially more volatile assets. A riskier currency tends to be one with a higher interest rate (more prevalent before the global slow down) or a commodity-based economy.

The Australian dollar is heavily traded based upon its link to commodity prices and consumption. The economy in Australia is driven by commodities – both metals and grains – and therefore feels significant influence from swings in demand and production, particularly from the Asian markets. In a ‘risk on’ scenario you are more likely to see increased demand for goods and higher spending which filters through to higher levels of production and consumption. Traders react in anticipation of this ripple, and purchase more these risk assets aggressively.

The Australian Housing Bubble Continues, is This Sustainable?

With almost every economic indicator suggesting that we will continue to see the Australian dollar strengthening versus the pound, the Australian housing bubble continues to be a focal point for those looking to buy dollars. The reason that this is significant when looking at exchange rate performance is that during a recession, house prices usually begin to decline, and therefore if this bubble bursts this could signal GBP strength and see a swing in the trajectory of rate movement.

National house prices across Australia continue to gain and averaged +0.4% growth throughout October. After several years of predictions that Australia’s property bubble will burst even a global pandemic has failed to prevent further gains so far. However, increasing unemployment coupled with the high level of debt most Australian households have (almost 50% more than the average American household) there is a concern that COVID could finally burst the bubble and see the trend reversed. This is something which should be monitored closely by anyone looking to sell Australian dollars as it could allow the pound to take control in the GBP to AUD pairing.