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
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
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.