Despite the negative news and worrying headlines, we recommend traders to make mental reframing of the situation. This way, you can look at the market from a different perspective. Let’s observe how you can take advantage of the uncertainties and make the fundamentals work for you!
AUD: facing the recession
Information is not investment advice
As we have seen before, JPY is the best contrast to observe AUD’s performance. In the monthly chart below, it leaves little doubt. Having dropped to almost 64.00 recently, AUD/JPY has now only 56.00 ahead in the course of the downward movement – that’s the strategic support left in the years 2000 and 2008. Will it be there? Fundamentals say, very possibly.
If you look around, you will probably find another factor pressing on the AUD. First, economic activity in China, the primary trade partner for Australia, has declined. Second, Chinese problems result in global slowdown and hit market’s risk sentiment. The latter is also hit by the new oil price war – a third negative factor. All these factors play against the Australian economy now. Consequently, Bloomberg Economics expects the Australian GDP to drop by 0.4% and 0.3% in the first two quarters this year respectively. That means – recession. And the latter means further pressure on the AUD. The Reserve Bank of Australia is trying to respond with what it has.
The Reserve Bank
The RBA already reduced the interest rate to the record low of 0.5% at the beginning of March. Although that still leaves small room for the rate maneuvers, the monetary authorities are now considering implementing quantitative easing measures to fight off the recession risk. That may be implemented through yield curve control, specifically aiming at three-year bonds. Observers comment this line is more adequate than direct asset purchasing and would more easily stimulate domestic household borrowing keeping the financial conditions more favorable. Needless to say, the AUD would be happy to see the economic pace pick up at home, rather than facing the first recession since 1991.
In the short-term, expectations of the quantitative ease may put pressure on the AUD as in any other case of such monetary policy step. But in the long-term, if the measure proves to significantly improve the condition of the Australian economy, the AUD will inevitably pick up as well. However, we have to assess the actions of the Reserve Bank of Australia against other central banks as the RBA will be surely taking into account their response to the coronavirus’ economic damage: the relative impact of each bank’s policy on their respective currencies will largely define how these perform against the AUD.
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