- AUD advances on all except GBP despite coronavirus shocker.
- GBP/AUD rate rises with GB bond yields as Chancellor resigns.
- AUD rises against others as RBA focuses on the AU positives.
- RBA and other central banks talking up bright side of outlook.
- But spread of coronavirus again threatens the outlook for AUD.
Above: Governor Philip Lowe. Photo Source: RBA on Flickr, reproduced with permission from the RBA press office.
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The Australian Dollar was riding high on Thursday after being cheered by commentary from the Reserve Bank of Australia (RBA) overnight although local firms are warning the antipodean unit is now at risk of losses as coronavirus concerns threaten to make themselves felt in currency markets again,.
Australia's Dollar was quoted higher against all major rivals other than Pound Sterling Thursday, with the British currency best-in-class following the surprise resignation of Chancellor Sajid Javid. Bond markets appear to think this might mean less resistance to a fiscally expansionist government.
The Pound-to-Australian Dollar rate was up 0.37% at 1.9373 in noon trading after chasing British government bond yields higher.
"The most plausible narrative to explain the rally in sterling is that markets are interpreting the news as a sign Boris has taken direct control of fiscal policy and that a Trumpian spending spree will ensue, raising prospects for growth and inflation," says Ranko Berich, head of market analysis at Monex Europe.
Above:Pound-to-Australian Dollar rate at 15-minute intervals, with 2-year GB government bond yield (orange line, left axis).
The Aussie was otherwise buoyed overnight by RBA Governor Lowe, who told a panel discussion the growth outlook has improved of late before playing down the risks posed by the coronavirus outbreak in China and reiterating the bank's earlier guidance suggesting the bar that must be overcome for it to cut interest rates again is now rather high. Although gains couldn't keep Sterling at bay.
"The net take-away was that the RBA, along with other global central banks, wish to focus upon areas of potential strength whilst acknowledging downside risks," says Tim Riddle, a macro strategist at Westpac.
The upward lift in 2020's market-implied RBA cash rates wasn't enough to keep the Pound at bay on Thursday but it did help lift the China-exposed Aussie against all other major rivals in moves could prove unsustainable if markets begin to panic again about the possible fallout for the global economy stemming from the coronavirus infection that's spreading inside and outside of China.
"More cases of the virus, further measures announced to contain the virus’ spread, and growing economic risks all suggest AUD has further downside," warns Elias Haddad, a strategist at Commonwealth Bank of Australia.
Above:AUD/USD rate shown at 15-minute intervals, with 2-year Australian government bond yield (orange line, left axis).
China's National Health Commission reported 15,152 new confirmed cases overnight and 254 new deaths, with both setting new records for their respective categories. That takes the total to 52,526, up from just 14,380 on February 01, while deaths have risen concurrently from 304 to 1,367.
"If new data shows that cases of the coronavirus are not stabilising, financial markets will price in the risk of further economic disruption in China and Australia," says CBA's Haddad. "Under this scenario, AUD can fall back towards the 10 February low of 0.6660."
Risk currencies like the Aussie had risen throughout the first half of the week as investors elected to focus on steady declines in the number of new cases declared on a daily basis, inferring from it that an end to the outbreak might have been in the pipeline, although that assumption was made to appear eroneous on Thursday by 13,332 new cases declared in Hubei province.
"The rapid rise in AUD that touched 0.6750 came as a surprise. The advance appears to be running ahead of itself and for today, further AUD strength is not expected. From here, AUD is more likely to drift lower towards 0.6700," says Quek Ser Leang, a strategist at UOB.
Above:Australian Dollar performance against major rivals Thursday. Source: Pound Sterling Live.
The NHC has said the increase in infections is the result of it now using "clinical diagnosis" methods in addition to nucleic acid tests, with the change coming just days after World Health Organization officials landed on the ground in China for the first time. And the two things combined could be indicative of further increases in declared infections being in the pipeline for the coming week.
"Global equities this week reached record highs, even as the economic impact of COVID-19 grew," says Westpac's Riddle. "Central bankers continue to insist the financial damage should be short-lived (with downside risks), followed by a rebound. But commodities, currencies and bond markets paint a less benign picture. We expect rallies in risk-sensitive currencies to prove fragile."
Stock markets and oil prices were lower on Thursday in response to the NHC declaration but China's Yuan was steady and so too were well-correlated Australian and New Zealand Dollars. But if Thursday's numbers are the beginning of a fresh climb in the growth rate for infections then the current calm in those currencies could come to an end. And that would likely mean fresh losses for the Aussie and more gains for the Pound-to-Australian Dollar rate.
"We are not convinced the current short-term AUD strength could extend much higher. For now, we expect AUD to trade sideways between 0.6650 and 0.6780. Looking forward, only a clear breach of 0.6780 would suggest that Monday’s low of 0.6657 is a more significant bottom," says UOB's Leang.
Above: Pound-to-Australian Dollar rate shown at daily intervals alongside AUD/USD rate (orange line, left axis).
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