FX Risk Rally Rolls On – Why Markets Shrug Off Civil Unrest

The persistent rally in equities reflects a general sense of optimism in the financial markets that is at odds with the anger and protests in major cities across the globe. USD/JPY broke above 108 at the start of the NY trading session and held onto its gains throughout the trading day. The same was true for other currencies that are sensitive to risk appetite such as the Australian and New Zealand dollars. This price action suggests that investors believe the economic impact of the civil unrest will be limited and short-lived. Whether that’s true remains to be seen as ongoing violent protests like the ones in Hong Kong have crippled the local economy. The 1992 Rodney King riots cost Los Angeles almost $4 billion according to some studies with over $1 billion in property damage. Coming at a time when economic activity is depressed by COVID-19, these protests could stall the path to recovery which would translate into billions of dollars in lost revenue. It all depends on the response of the federal government and unfortunately, confidence on that front is waning quickly. With that said, none of this seems to matter to investors who prefer to find comfort in reports that China may continue to buy US soybeans and the liquidity spigot will stay on for the foreseeable future.

Risk appetite should be supported by tomorrow’s US ADP and non-manufacturing ISM reports. From a logistical perspective, the service sector was able to restart before manufacturing and while ADP is expected to report more job losses, the pace should ease. This could help the dollar rally, particularly against the euro ahead of the European Central Bank’s monetary policy meeting.

The Australian dollar hit a fresh 3 month high after the Reserve Bank left interest rates unchanged last night. This rally should not surprise our readers who saw our data table illustrating the widespread improvements in Australia and China’s economy since the last RBA meeting. While they emphasized the need for accommodative policy, said they were prepared to scale up bond purchases if necessary, indicated that rates will not increase until there is meaningful progress made towards full employment, investors found relief in their positive outlook and the lack of mention of Australia-China trade relations. The central bank said there’s been signs of pickup in consumer spending and stabilization in hours worked that fosters the belief that the downturn will be less than previously expected. When tonight’s first-quarter GDP numbers are released, they are expected to show the first contraction since 2008. However given the better than expected retail sales and trade numbers, the risk is to the upside for this release.

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