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Australian Dollar: 4 Positives that Signal Potential for Strength Ahead

- GBP/AUD above 2.0, but looking heavy
- Four AUD-positive developments to report at start of week
- Watch Chinese PMI data on Tuesday for near-term direction
- Buy AUD say RBC Capital

Iron ore mine

Image © Adobe Stock

- GBP/AUD spot rate at time of writing: 2.0157
- Bank transfer rates (indicative): 1.9450-1.9594
- FX specialist transfer rates (indicative): 1.9800-1.9980 >> More information

The Australian Dollar is one of the better performing currencies at the start of the new week as global financial markets welcome a weekend relatively free of coronavirus drama, ensuring that while the Pound-Australian Dollar exchange rate still trades above 2.0 it looks heavy and at risk of another slip below this psychologically significant mark.

The Australian Dollar is advancing against the majority of the world's largest currencies amidst supportive news that includes a government support package for jobs, robust iron ore shipments, a declining rate of spread of the coronavirus in Australia and new stimulus measures announced in China.

Aiding the domestic picture was further support for the economy announced by the government, that should ultimately lessen the downside impact of the coronavirus outbreak on the economy. A $130BN jobs support package was announced which will see the government  subsidise wages over the upcoming 6 months.

The main feature of the package is the wage subsidies of A$1500 every fortnight per employee to help businesses retain them. The total value of the government's support packages now stands at around $213BN.

Research from Westpac shows Australian iron ore exports were up 25% month-on-month by March 20 and up 26% year-on-year when grossed up for the full month, making it strongest March on record.

Adding Brazilian data, global iron ore traffic is up 28% year-on-year and March looks set to be the first combined 100mt month since December.

The data is remarkable considering the global economic slowdown linked to the coronavirus outbreak which has severely limited global trade flows and was expected to result in lower demand from China, Australia's main export destination for iron ore.

Stats iron ore

Iron ore is Australia's premier export and is therefore a significant source of foreign exchange earnings for the country and a critical component in keeping the value of the Australian Dollar supported, particularly as a slump in global investor sentiment denies the country of foreign capital inflows.

It was meanwhile reported over the weekend that half as many Australians are catching coronavirus as a week ago with the borders, pubs, and restaurants now shut.

Should Australia's infection rate have peaked then there is the real prospect that Australia is one of the least-impacted major economies. What will be important for global foreign exchange rates over coming weeks and months is the recovery rate of the world's economies, with those recovering fastest likely to see their currency benefit.

Australia is believed by economists to be experiencing its first recession in decades as a global economic slowdown combines with domestic efforts to halt the spread of the coronavirus outbreak which has ultimately shuttered the country's services sector.

Economists at ANZ, one of Australia's largest lenders, say they estimate that a six-week widespread shutdown in the second quarter, and then a progressive relaxation, will see GDP slump 13% over the quarter.

"Unemployment, unfortunately, will spike as a consequence, with more than a million jobs lost and the unemployment rate reaching 13%," says David Plank, Head of Australian Economics at ANZ Bank.

ANZ forecast the economy will rebound in the third quarter, but the after-effects of the downturn mean the recovery after this initial rebound is quite subdued.

By the end of 2021 unemployment is expected to be around 7%.

Any upgrades to the economic outlook resulting from an earlier-than-expected decline in coronavirus infections could therefore ultimately aid the Aussie Dollar.

GBP to AUD chart

Above: GBP/AUD has been trending higher but looks unable to make a decisive break above and away from 2.0

Also aiding the Aussie Dollar outlook at the onset of the new week is news that the People's Bank of China (PBoC) unexpectedly cut its seven day reverse repo rate from 2.40% to 2.20%.

The reverse repo is the interest rate the PBoC charges on loans to banks and cutting it is expected to aid the economy. Further support is meanwhile expected to be announced by the government over coming days.

"While the 20bp cut is the biggest cut since the PBoC, we expect the Chinese authorities to focus mainly on lifting government spending rather than loosening monetary policy. Over the weekend, Chinese state media suggested the government will increase its fiscal deficit, issue special sovereign debt, and allow local governments to sell more infrastructure bonds," says Joseph Capurso, foreign exchange strategist at Commonwealth Bank of Australia.

The support to the Chinese economy comes as the country declares its battle with the coronavirus to have been largely won, which should allow the economy to return to full potential over coming days and weeks. This matters for the Australian economy and its currency as China is Australia's main trading partner, and the outlook for the two economies are closely intertwined.

What's good for China often tends to be good for the Aussie Dollar.

Regarding the immediate outlook for the Australian Dollar, we will be watching the release of PMI data out of China which is due for release early on Tuesday morning (2:00 BST), with any better-than-expected numbers likely to prompt gains in the Australian currency.

Ahead of the data releases, RBC Capital Markets says their trade of the week is to buy the Australian Dollar against the Canadian Dollar, noting the Aussie has already bounced "from oversold levels, and we think can benefit from relative data surprises in their respective trading partners and relative terms of trade," says Elsa Lignos, Global Head of FX Strategy at RBC Capital Markets.

The Australian Dollar is currently marginally higher against the Pound, with the Pound-to-Australian Dollar exchange rate now quoted at 2.0116.

The Australian-to-U.S. Dollar exchange rate is at 0.6147, ensuring the dip below 0.56 seen on march 19 is a thing of the past and we would look for further improvements from here as the recent global shortage of U.S. Dollars appears to have faded.

The Australian-to-New Zealand Dollar exchange rate is meanwhile trading at 1.0226 as the pair looks set to consolidate in its new, albeit lower, range.


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