There’s no doubt that Australia has had a difficult start to the year and this has had an impact on the Australian dollar. The scale of the devastation from forest fires and flooding has been compounded by the advent of the coronavirus outbreak in China. Since the outbreak, all commodity-based currencies have been struggling due to changes in global trade and demand for oil. In Australia, this has been compounded by the domestic difficulties and kept the Australian dollar on the back foot for most of the year. Reserve Bank of Australia (RBA) President Philip Lowe has stated that the effects of the virus outbreak are only short term, but acknowledged that the impact has been significant.
Untangling Australia’s ties with China
Australia has close trade ties with China, which is one of the reasons that the Wuhan virus has had such an impact. Any changes to the Chinese economy have a knock-on effect on the Australian economy and in China, the presence of the virus has caused significant disruption. The Australian construction industry has been impacted because of a lack of raw materials arriving from China. Car production has been halted in China and this has had an impact on Australia both as an importer and as a key point on major trade routes. Tourism has also been impacted because many visitors to Australia travel via Hong Kong and Singapore and fears over the spread of the virus mean that both business travellers and tourists are staying away from Australia as a result.
RBA keeps Cash Rate on hold
At the beginning of the year, when the virus was first identified, it seemed that the Aussie may have the opportunity to emerge unscathed. Economic data from China were theoretically disappointing but did no practical damage to the currency. At the time the focus was elsewhere, and the scale of the outbreak had not yet hit the financial markets in a significant way. Towards the end of the January, the Aussie was beginning to struggle. The RBA announcement to keep the Cash Rate benchmark unchanged was largely expected, but investors had braced for the possibility of a rate cut due to the overall economic picture and the Australian dollar did make some gains after the news.
Coronavirus impact likely to be short-term
It seems as if the stoic approach of the RBA may prove beneficial to the Australian dollar as the year progresses. In a recent speech, RBA Governor Philip Lowe sounded a note of caution on the “major effect” that the coronavirus has been having on trade, tourism and education but noted that the effects are likely to be short term. What Lowe described as the “profound” impact of climate change on the global economy may be more of a concern for the Australian dollar in the long term, but there’s no doubt that the coronavirus is due to have a significant impact until the virus has been eradicated and fears recede.
Cool heads and silver linings
In the coming weeks, the coronavirus may continue to dominate headlines and cast a shadow over the Australian dollar but it is not the only currency on the back foot and this cloud does have a silver lining. At the end of January, NAB’s monthly business survey offered “further evidence that activity stabilised in Q4”, while consumer prices rose by 0.7% in the fourth quarter of 2019. With headline inflation for 2019 reaching 1.8%, the likelihood of a rate cut by the RBA has diminished in the eyes of investors. Whether the Australian dollar can hold steady long enough to support a rebound remains to be seen. The challenges are clear but a recent Westpac survey on consumer confidence showed an overall improvement of two points to 95.5 despite overall weakness. As the RBA calls for cool heads to steady the ship, the opportunity remains for the Aussie to make gains if the recent news of a potential cure for the coronavirus takes effect. In the meantime, there may be continued volatility in the value of the Australian dollar until calmer waters are on the horizon.
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