Currency Market Dynamics Amid Market Buoyancy And Recession Fears

Currency Market Dynamics Amid Market Buoyancy And Recession Fears

Markets have been shaken with global equities falling into bear market amid record volatility due to coronavirus. The volatility in the financial markets and looming fears of global recession has sparked selloff behaviour amid investors.

Investor fears have reached new highs on the coronavirus outbreak- which has spread in 203 countries and territories around the world. Widespread social distancing measures have brought economies to a sudden stop.

The virus has affected more than 1 million people worldwide till now with ~53k deaths, according to latest John Hopkins data.

The Dow Jones Industrial Average and S&P 500 have recorded the largest percentage falls since the October crash of 1987.

The S&P/ASX 200 index has been under pressure, from recording its record high of 7163 points on 20 February to bottoming-out at 4546 points on 23 March 2020.

AUD/USD Struggled in March; Some Momentum Continued Though

The AUD/USD fell to its lowest levels to 0.5510 on 19 March before picking up and ending March at a higher level.

The deep selloffs in the markets and spike in risk aversion attitudes amongst investors have been pulling down AUD/USD.

Russia abandoned OPEC production quota triggering Saudi Arabia to offer deeply discounted oil prices resulting. Slashed oil prices, coupled with falling commodity prices due to demand slump arising from global economic fallout, contributed to downward pressure on the currency.

ALSO READ: What’s Grabbing Attention in Currency Market?

RBA policies of reducing cash rate to 0.25%, implementation of quantitative easing with yield curve control seemed to have little influence on AUD as Federal Reserve along with other central banks matched RBA measures.

However, AUD exchange rate got some support amidst positive economic data releases of China even when the country was in lockdown. Also, $130 billion latest JobKeeper package introduced by Morrison government raised some hopes in the currency market.

Analysts anticipated China’s official manufacturing PMI to be at 45 for March from a record low of 35.7 in February 2020. The official data, however, posted the figure at 52, beating expectations and reflecting growth in the economy of China.

This has been perceived as positive news for AUD as Australia is heavily tied to the Chinese economy. China is Australia’s largest export and import trading partner. About 25% of manufactured imports in Australia arrive from China, while 13% of Australia’s exports are thermal coal to China.

AUD is likely to gain if the Chinese economy continues to show improvement. Westpac has predicted the AUD/USD exchange rate to edge higher over coming quarters, reaching to 0.70 in December 2021.

Australian Economic Outlook

Governments worldwide are rolling out relief packages to control the economic fallouts arising from the virus outbreak. Scott Morrison, PM of Australia, recently pledged A$130 billion coronavirus plan to subsidise wages of 6 million workers to control further job losses.

As per ABS release on 1 April, the dwelling approvals rose by 19.9% in February in seasonally adjusted terms driven by an increase in private sector dwellings across houses.

While the private sector credit rose 0.3% month on month in February in line with the expectations. These events can support in the uplifting of the Australian dollar.

However, Commonwealth Bank Manufacturing PMI fell to 49.7 in March from 50.2 in February reflecting deteriorating manufacturing conditions due to record falls in output and new orders due to COVID-19 outbreak. Declining business confidence, supply chain disruptions and other restrictive measures contributed to the fall.

Hence many investors remain in jittery due to increased volatility amid coronavirus and downside risks bearing down AUD.

OECD has predicted a gloomy outlook for the Australian economy, stating that the economy will have to suffer a cut of 22% after a widespread shutdown. Westpac has forecasted GDP to contract by 3.5% in the June quarter and a sharp spike in the unemployment rate to 11% by mid-2020.

Needle On USD/AUD As Coronavirus Hit US Economy Hard

The US Dollar rallied in the first half of March while investors rushed for safe havens amidst unprecedented market turmoil, before reaching a peak on 19 March and starting a dip.

The USD/AUD gained on 31 March 2020 closing at 1.6298 after falling for a week since 20 March. 

A positive US Pending Home sales data, a measure of real-estate transactions, rose 2.4% in February against anticipated negative 1% provided some cushion to the the sentiments. Seems that lower interest rates have prompted buyers to buy more homes and utilise credit advantages.

However, the Conference Board Consumer Confidence Index for March fell to 120 from 132.6 in February, citing deterioration in the outlook due to rising coronavirus cases and extreme volatility.

The US has now become the new epicentre of coronavirus, recording the third-highest number for deaths after Italy and Spain with death toll crossing 3300. Millions of Americans are currently staying at home due to lockdown orders by the Government. Record high unemployment claims is casting gloomy picture on the economy.

The further currency attractiveness will depend on coronavirus containment and the ripple effects of Donald Trump’s US$2 trillion stimulus package aimed at strengthening the economy.

Economists still consider USD as stable as coronavirus stops investors to indulge in risk-sensitive currencies like the Australian dollar and the New Zealand dollar. The greenback currency is expected to continue to appreciate as investors continue to hop toward safe-havens. 

Currency movements to monitored in near future amidst market uncertainty, faded risk appetite and technical obstructions.

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