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Australian Dollar is continuing its losing run since the start of the year, as market participants embrace the increasing concerns of supply-chain disruptions on the back of stalled production in China, which could have potential spillovers in the short-term demand.
Related read: AUD Made Decade Lows; Receding Rate Cuts to Provide Support
While AUD is on a free-fall, the Japanese Yen has strengthened against the major G10 rates in the last five days, including SEK, USD, GBP, CHF, NOK, NZD. In the same period, the flight to safe haven assets has intensified.
Sovereign debt yields have been plummeting across the board with Australian debt yields also touching record lows. On Friday in the US, the US 10-year yield settled at around 1.13% - lowest it had been in the last 15 years – way below the y/y change in all items CPI (2.5%).
In today’s session, the AU 10-year bond yield touched a record low of 0.67% before closing the day at 0.81%, while NZ reported its first coronavirus case. Domestically, the recent releases by the economic bodies have added to the panic in the markets and added further woes to the existing concerns.
Such that, the market has bought forward the expectations of an interest-rate cut by the Reserve Bank Australia, thereby fueling additional moves in the currency for Australian FX pair.
Figure: AU Sovereign Debt Yields (In percent)
Source: RBA Daily Interest Rates
However, this step backwards in the global markets appears to be somewhat reasonable given that we have:
- deteriorating assumptions of the forecast,
- implications of latest earnings results and management commentary,
- concerns around the earing visibility for the near-term,
- benchmark indices at record highs across the board,
- hangover of widespread uncertainties like Brexit and de-globalization,
- the threat of a growing pandemic.
As there is a paramount level of uncertainty around the implications of the coronavirus and we still don’t know much about the disease; this creates additional panic in the markets which is further fueled by unfolding events like virus making way to ‘close-to-recession’ regions like Europe, thereby creating opportunities for ‘ increasingly-popular momentum and algorithmic strategies’ to possibly uncover wild moves across asset classes.
Related: Iron Ore Might Whiplash Your Returns Ahead; Things to Consider Before Pulling Trigger
Although China has been asking citizens to return to work, the employers are facing problems in finding labour due to the shortage of migrant labour. But there would be more news, as incoming economic numbers from China for the early-2020 are likely to be subdued, reflecting the lockdown and wartime measures.
It’s not just coronavirus, AUD has other downside risks as well, including:
- disappointing incoming economic data,
- social, economic and moral shocks like bushfires, drought, and floods,
- record low interest-rates,
- low average economic growth,
- revamped interest-rate cut expectations,
- subdued household confidence levels,
- falling commodity prices (specifically base metals).
Markets are waking up to dramatic shocks day in day out, with large global companies reducing guidance – indicating supply chain disruptions in addition to stalled production – thereby raising concerns over ‘quality’.
Related: Market Seeks Safe Haven Shelter Once Again, Coronavirus or Overvaluation?
Last week’s sell-off is largely attributed to increasing number of coronavirus cases across major developed economies as well as smaller nations like Iran, Brazil etc. Policymakers around the globe have been sending warning signals, while measures like travel ban, screening and quarantine are likely to help in containing the virus.
Sluggish China is a double whammy for AUD
A thriving China keeps the Australian economy steady due to the close and deepening trade relations between the two nations, with a free trade agreement in place. Every year Chinese tourists not only flood Australian cities but also the major global cities; this year the summer season was ravaged with natural calamities as well as travel bans.
Besides, the lockdown in the Chinese factories could have implications for the Australian industrial exports that fuel the Chinese factories and crashing commodity prices are indications of the same.
And the spillovers may not be limited to commodity prices, but a long list of goods and services that may include raw material suppliers and equipment suppliers from China, meat exports, suppressed demand due to supply-chain constraints in China and maybe other unknown developments.
Further rate cut expectations looks bleak, but has tumbled AUD
Recently, the economic data on capital expenditure has suggested disappointment by the Australian Bureau of Statistics (ABS). In 4Q 2019, the total new capex was down 2.8% on the previous quarter, and 5.8% down on the previous year.
Unemployment rate of the month of January 2020, on a seasonally adjusted basis, came worse by 0.2 pts over the previous month at 5.3%. The data showed that the monthly hours worked for all jobs declined by 8.1 million hours.
Also, the total value of construction work done, on a seasonally adjusted basis, fell 3% over the previous quarter, and 7.4% over the previous year. Largest fall was recorded in the residential construction at 12.8% over the previous year.
All these deteriorating conditions of the underlying economic factors led the traders price-in the chances of the interest rate cuts when the RBA considers the economic situation in the upcoming meetings, including a March rate cut, which seems pretty certain given that the three-rate cuts of 2019 are yet to show last-mile impacts.
