FX Weekly Update 11 Sep 2020

The Week in Review

The AUDUSD had a mixed week, with little news flow dictating the price action after US markets were closed on Monday for the Labour Day Weekend. It opened in the high 0.72s and hit a low of 0.7193 early Wednesday morning as US equity markets continued a 3-session selloff following on from last week. The selloff was driven by technology stocks, as investors began to question record valuations after it was revealed that SoftBank was aggressively buying leveraged derivatives on them throughout August. The S&P500 dropped 0.2% this week, after falling roughly 7% peak to trough over from the latter half of last week. The ASX followed, dropping to a 11-week low. In other news, the ECB met overnight leaving, rates unchanged as expected.

AUDUSD Weekly Movements

Softbank

The Financial Times last week revealed in an article that SoftBank (a large Japanese conglomerate) in their tech investment fund had been aggressively purchasing call options on US tech names – allegedly totalling more than USD 4 billion in premium paid. Due to how this leveraged view was hedged by SoftBank’s banking counterparties, market moves were significantly exacerbated, such as Tesla rising more than 70% in August. The revelation of SoftBank’s speculative position-taking sowed seeds of doubt into investors’ minds about the big valuations of the tech names, with stocks like Tesla experiencing significant bouts of volatility over the past few days. Tesla fell 21% when the US came back on Tuesday from their long weekend (the stock’s worst day in history), but then was immediately followed up by a up 11% day on Wednesday.

The European Central Bank

European Central Bank (ECB) President Christine Lagarde took a modest outlook on Europe’s economic recovery, announcing the monetary policy will remain unchanged whilst providing a slight upgrade to the banks 2020 growth forecast (-8.7% to -8%). As the rising euro continues to impact European exports, Lagarde played down concerns of the appreciation of the currency, stating the governing council will continue to ‘carefully monitor’ the situation. Investors had expected tougher language, with the euro climbing half a percent upon the ECB monetary update.

Whilst the ECB has stated it does not have any specific exchange rate target, policymakers remain uneasy over the impact the currency could have over any potential policy change. ECB chief economist Philip Lane warned that the current level will be assessed during policy making, thus leading to a wider impact for the European economy.

Australian Share Market (ASX)

The ASX 200 dropped to an 11-week low, with the Australian market returning to the level last seen at the end of June. Australian shares felt the impact of the movements in the US market, with Australian technology stocks falling following the slide in the US technology market. The S&P/ASX All Technology index fell 1.9%, with Afterpay and Appen following suit to drop 3.2% and 2.4% respectively.

The Week Ahead

Key events to watch for next week:

· US Core Retail Sales – Wednesday 10:30pm

· US Federal Reserve Statement– Thursday 4:00am

· New Zealand GDP – Thursday 8:45am

· Australian Unemployment Rate – Thursday 11:30am

· Japan Monetary Policy Statement – Thursday Tentative

· UK Monetary Policy Statement – Friday 9:00pm

References

Bloomberg.com. 2020. Bloomberg – Are You A Robot?. [online] Available at: <https://www.bloomberg.com/news/articles/2020-09-10/ecb-discussed-euro-strength-said-to-agree-no-need-to-overreact?sref=92Is2d7a> [Accessed 11 September 2020].

Ft.com. 2020. Softbank Up $4Bn On Founder’S Aggressive US Stock Options Bet. [online] Available at: <https://www.ft.com/content/53aa19bb-fc9a-46fd-aafd-4bc3669ab161> [Accessed 11 September 2020].

Australian Financial Review. 2020. ASX To Fall As Selling Returns To Wall St. [online] Available at: <https://www.afr.com/markets/equity-markets/asx-to-fall-as-selling-returns-to-wall-st-20200911-p55ujw> [Accessed 11 September 2020].