- AUD and SEK to out-perform other G10 currencies.
- AUD vs USD rate could see the US dollar looking vulnerable.
- G10 currencies favoured over emerging market.
Currency forecasts linked to recovery plan from COVID-19
ING has compiled an FX scorecard to help forecast the future performance of G10 currencies – the 10 most heavily traded currencies in the world – amid the intrinsic link with a successful recovery plan from the COVID-19 pandemic in their respective countries. The length of the lockdown will determine the size of the economic contraction, particularly in Q2 and the impact on corporate revenues and their share price.
Current USD to AUD rate: 1.4432 AUD
Current AUD to USD rate: 0.6929 USD
Current AUD to EUR rate: 0.6151 EUR
Markets have been welcoming the flattening of COVID-19 curves and plans to re-open closed economies. This, along with the huge stimulus packages from major economies around the world, have begun to drag market risk further away from their peaks in March. ING reports that volatility levels are declining across the board and the USD Libor-OIS spread, a metric of inter-bank funding stress, is now at levels not seen since early March.
The ING FX scorecard has been based on various different factors, including:
- Real rates – inflation is deducted from the policy rate.
- Correlation with the US yield curve and misvaluation of each currency vs USD.
- Exposure to oil markets – based on that country’s level of oil exports because we all know what’s happening with oil right now.
- Sovereign ratings – S&P’s sovereign rating are included in the FX scorecard to favour countries with a more secure outlook.
AUD to out-perform, particularly AUD vs USD
ING’s reports found that some of the pro-cyclical currencies which don’t have exposure to the oil market look most likely to lead FX markets through the recovery phase. SEK and AUD are determined by ING to both be under-valued in their medium-term valuation model. Neither SEK or AUD have a large exposure to oil.
AUD has already pared most of its Q1 losses and its relatively strong fundamentals should allow it to keep leading any additional risk recovery in G10.
The key points in favour of AUD include; the Australian government has stepped in with a significant AUD 320bn (around 16% of GDP) relief package, Australia has been particularly successful in flattening the COVID-19 contagion curve, Australia’s biggest export, iron ore, has maintained steady demand from China and Brazil, and the reserve bank of Australia has already started some tapering – it may be one of the first ones to lift stimulus measures as the global economy recovers.
Finding consistency with ING’s views that the US dollar will underperform during a recovery phase, the ING FX scorecard showed the dollar performing poorly too. EUR appeared mid-table and seemed unlikely to lead pro-cyclical currencies higher at the moment. Overall, ING preferred G10 currencies over emerging markets, particularly in the early stages of recovery, when the strength of a sovereign’s balance sheet is important.
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