- Australia showing signs of optimism for the economy, but there is a hard landing on the horizon first.
- AUD/USD will suffer from a slump in global demand and hamstring by the USD.
AUD/USD is trading at 0.6287 having travelled between 0.6253 and 0.6346, down -0.77% on the day so far. Commodities are down hard and the US dollar taking back the 100 handle as risk sours heavily following the rout in oil and stark reminder just how bad the global economic situation is.
The CRB Index is bleeding heavily today, -11% at the time of writing, pertaining to a very grim economic backdrop. Investors are thinking twice about that V-shaped recovery regardless of whether new cases of COVID-19 are ebbing or even that some nations are very slowly easing social distancing measures. These are unprecedented times and there is no real telling at this stage of how deep of a global recession it will be.
The US dollar is proving its weight at times of volatility (VIX moving higher again) and uncertainty despite the measures taken by central banks to stabilise swap-line liquidity for the greenback. What this means, is no matter how bullish circumstances could be domestically for Australia with respect to a relatively modest COVID-19 threat, (only 13 new cases of COVID-19 were counted in the country yesterday), should a stronger dollar prevail, it might just mean that AUD/USD will be one of the least hurt until other nation’s COVID-19 curves begin to flatten.
Meanwhile, “it may be way too early for politicians and central bankers to start patting themselves on the back, but in Australia, there may at least be room for the first sighs of relief,” analysts at Rabobank explained and added:
“PM Morrison has declared that the country has reached a turning point in the fight against the coronavirus with the result that some non-emergency medical procedures will be allow to resume. On May 11 some states are already looking to re-open schools and lift other restrictions to allow businesses to reopen.
The RBA also appears to have had success in weathering the initial phase of the crisis well, with levels of stress in the money market having abated and the size of its QE purchases already scaled back.”
Aussie economy to suffer the fate of all nations combined to COVID-19 lockdowns
However, while the USD is a factor, the Aussie economy is headed for a hard landing. Indeed, Australia has been fortunate to avoid the catastrophic impact that COVID-19 has had on Europe and the US, especially considering how adjoined the nation is to China in both proximity and trade, however, there lies a critical case in point.
Australia relies on China to buy its exports and has enjoyed a good run dealing with China which has been in expansion for the past 28 years ever since it started reporting quarterly GDP figures. However, the March quarter just ended and the contraction came in at 6.8% on Friday reflecting the shutdown cost to the economy.
AUD trades as a proxy to global growth, demand and commodities in trade. With the oil price shock, it is a stark reminder of the demand story in the global economy and that will filter through to key markets for Australia, such as coal, iron ore and copper. All of these markets are going to struggle which will ultimately weigh on AUD.
So, no matter that Australia could have one of the easiest service economies to bounce back, (limited COVID-19 impact), the grander macro picture is an entirely different matter and that is where the focus should be with regards to Australia’s position in this global crisis.
“Although the RBA has managed to tone down the size of its weekly bond purchases already, this is a policy that is set to remain in place for some time and low rates will remain in place for even longer. We see risk on another dip below AUD/USD0.60 on a 1 to 3 month view,”
– analysts at Rabobank argued.