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Aussie Dollar Flirting with Decade Lows

The Australian dollar recently tumbled into new decade-low territory, with the currency since rising but continuing to flirt with long-term lows. The dollar dropped to just 66.60 US cents, before rising to settle into a range of 67.10 to 67.50 US cents. With the Aussie dollar already on a fairly sharp downwards trajectory since the end of December, the latest fall into fresh territory could be a sign of things to come.

The weak Aussie dollar is the result of many factors, including weak domestic growth, coronavirus jitters, and international pessimism. The domestic economy is not exactly surging ahead, with the coronavirus putting additional pressure on both commodities and the tourism sector. The local currency relies heavily on the world’s second largest economy, with resources leaving the country and people coming into the country both severely affected by the outbreak.

According to Westpac senior currency strategist Sean Callow, “The Aussie is absorbing a lot of bad news from its number one trading partner... There’s been a very steep fall in Australia’s key commodity prices since mid-January, which was the peak of our export prices... The ripple effect is huge on the commodity side and obviously there’s a grave threat to Australia’s service exports from the travel restrictions on Chinese nationals.”

The Chinese economy is expected to grow just 4.5% in the first quarter of 2020, compared to 6% growth achieved in the final three months of 2019. The People’s Bank of China injected a record USD $83 billion into the economy on Jan 17, and another $129 billion over recent days as the Chinese stock market slumped. While it claims everything is under control, China’s government is using multiple targeted fiscal measures to soak up coronavirus losses.

Just how much the current situation in China will affect Australia is guesswork at this stage, with no-one sure exactly how bad the virus will get. The Australian dollar was already forecast to fall over the next few months, with the situation in China possibly speeding up the rate of decline. While Reserve Bank governor Philip Lowe originally forecast the dollar to fall to 66 cents by the middle of the year, this will be reassessed as the situation unfolds.

The Reserve Bank has continued to soften its approach to interest rates. A rate cut of 25 basis points will see levels fall below the current record of 0.75%, with this situation deemed to be 50% likely in May and almost certain by August. According to Mr. Callow, this could lead to the Aussie dollar being as weak as 65 US cents by the end of the year. Quantitative easing is widely expected later in 2020 as the Reserve Bank seeks to stimulate Australian economic growth and inflation.

Despite the worry surrounding the coronavirus, markets are significantly calmer after a reduction in the number of new reported cases over recent days. As most Chinese factories return to work, the local dollar seems to have found a slightly elevated and somewhat buoyant position. Somewhat surprisingly, the Reserve Bank of New Zealand has also had a positive effect on the Australian dollar. A recent report forecast no rate cuts in New Zealand for the remainder of 2020, which caused a surge in the New Zealand dollar and carried the Aussie higher as well.

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