Why Australian Dollar is Shining; Optimism in Equity Markets Tops the List

Over the last one month, spot rates of AUD/USD contracts have moved from $0.63/USD to $0.66/USD at the time of writing today (rounded values). This could be attributed to a range of factors, including a spike in iron ore prices.

As Brazil is battered with coronavirus, iron ore supply issues are increasing for the world. At the same time, China is coming back online with a revival in demand. At the time of writing, iron ore prices were quoted above USD 90 a tonne.

Iron ore prices have recovered from the lows of USD 78.33 a tonne, which was recorded in February this year when China’s lockdown was in full swing. Although rising iron ore prices are favourable for domestic iron ore miners, steelmakers will likely face issues as a result of this movement in price. Major Brazilian iron ore miner, Vale has already lowered its guidance for iron ore production in 2020.

On the domestic front, the Reserve Bank of Australia has recently noted that economic recovery may start in the second half of calendar year, 2020. The Bank will continue to target the 3-year yield curve until progress is achieved on full employment and inflation targets, and same goes for the cash rate target.

As a risk sensitive currency, Australian Dollar usually moves consistently with the markets and economic activity.

Since April, there have been positive developments, including in vaccines. Besides, number of countries are easing restrictions on people movement and China’s commodity-laden economy is resuming. Chinese policymakers are expected to unveil stimulus package on 22 May and is likely to include the targets for GDP growth, unemployment as well as fiscal deficit target.

The Council of Financial Regulators (CFR) attended the FINSIA forum today. RBA Governor, who chairs the council, noted that financial systems are well placed to deal with COVID-19.

The financial system of the country has large capital buffers to support the economy at difficult times, as over the past years, the resilience of financial systems has been stemmed by the APRA.

However, tensions have been brewing between China and Australia concerning their trade partnership, as the latter has taken a stance on the independent enquiry into the originations of COVID-19.

Of late, Chinese authorities have suspended four beef processing facilities of Australia and threatened to place restrictions on the barley imports by China from Australia.

Today, Chinese Custom Officials floated a new regime, which would see importers of iron ore from China giving a nod for supervisory checks on the shipments coming through iron ore miners.

Major miners ended lower by the end of the day with BHP Group Limited (ASX:BHP) down by 0.6%, Rio Tinto Limited (ASX:RIO) down by 1.03%, and Fortescue Metals Group Limited (ASX:FMG) down by 2.15%.

Domestic Equities in Mix Today

By the close of trading session on 21 May 2020, S&P/ASX 200 stood at 5,550.4, down by 22.6 points or 0.41% from the previous close. After rising in the morning session, the index shed gains post mid-day.

Essential network services business, Service Stream Limited (ASX:SSM) noted that demand has continued to remain strong albeit cost challenges. It is now expecting EBITDA of approximately $108 million from operations for FY20, which is believed to be the strongest operating result. With strong business position, the Board has confidence to stand firm on its commitment to dividends. It closed at $2.07, down by 5.9% from the previous close.

Fortescue Metals Group Ltd (ASX:FMG) presented at the Goldman Sachs today. In the March quarter, it recorded an increase of 10% in shipments at 42.3 mt over the pcp at an average realised price of USD 73/dmt. Shares ended at $13.6, down by 2.15% from the previous close.

Steadfast Group Limited (ASX:SDF) has reported its April 2020 performance, noting that EBITA for the month was consistent with pre-COVID expectations. For the 10 months to April 2020, EBITA stood at 21.8%, higher than same period last year. SDF closed at $3.22, up by 6.27% from the previous close.

DroneShield Ltd (ASX:DRO) notified that its product DroneGun Tactical^TM was selected by the European Union Police. The new product would be incorporated in a number of police forces across the economic block and orders will likely commence this quarter. DRO closed at $0.17, up by 61.9% from the previous close.

Bigtincan Holdings Limited (ASX:BTH) is seeking to raise up to $40 million, of which $35 million have been committed by institutional investors and up to $5 million via a non-underwritten share purchase plan. It intends to utilise funds on M&A opportunities, strategic priorities, tech investments, and capitalise on arising opportunities in the SaaS market. BTH closed at $0.73, down by 3.9% from the previous close.

Afterpay Limited (ASX:APT) reported that, in the US, around 9 million customers onboarded the platform and over 15k retailers are offering its services. It reckons more than 85% of orders executed with debit cards. APT closed at $,44 up by 2.58% from the previous close.

NRW Holdings Limited (ASX:NRW) notified that revenue for the ten-month period ended in April was $1.6 billion, ex-AASB 16 EBITDA was $177 million, and cash less interest bearing debt was $115 million. The Company is due to pay interim dividend of 2.5 cents per share on 9 June 2020, which was deferred earlier. NRW closed at $2.19, up by 32.72% from the previous close.

Arena REIT (ASX:ARF) notified that all of its portfolio is operating and open. The Company expects second half dividend of 6.75 cents per share to 6.85 cents per share. ARF closed at $2.18, up by 2.83% from the previous close.

(All currencies in AUD unless or otherwise stated)