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Australian Dollar, ASX Recouple In Misery As Coronavirus Spreads

Australian Dollar, ASX Recouple In Misery As Coronavirus Spreads

2020-02-25 02:53:00
David Cottle, Analyst
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Australian Dollar, ASX, Coronavirus - Talking Points:

  • The ASX 200 managed to gain last year even as the Australian Dollar and bond yields sagged
  • Lower interest rates offered the index support they denied to the currency
  • Now the coronavirus’ spread weighs heavily on both

Australia’s Dollar and its ASX 200 stock benchmark are both growth-corelated assets and, after a period of divergence, have recoupled as coronavirus spreads globally and investors come to realize that nowhere will be entirely insulated from it.

The ASX 200 equity index diverged quite sharply in 2019. That was understandable. The prospect of looser Australian monetary policy weighed on the currency and bond yields but supported stocks. Share markets found other reasons to be cheerful as the old year bowed out. An interim US-China trade deal was inked and Britain’s December election broke parliament’s three-year Brexit gridlock.

S&P/ASX 200 vs AUD/USD vs Australian 10y Gov’t Bond Yield (weekly chart)

Australian Dollar, ASX Recouple In Misery As Coronavirus Spreads

Chart created with Trading View

However, the coronavirus story now runs all tables. This was clear in Wall Street’s epic Tuesday swoon but that was merely the most obvious sign of a trend that has been in development for months.

Since the start of February, the ASX has clearly joined the Aussie and domestic yields on the road lower. It is perhaps arguable that the stock market’s resilience might have ended sooner given the myriad ways in which the outbreak could feed back to the Australian economy. The Reserve Bank of Australia is very well aware of these, as its latest communication made clear. That equity investors were so much less so is surprising, but it seems they were. After all the index made a record high as recently as February 20.

S&P/ASX 200 vs AUD/USD vs Australian 10y Gov’t Bond Yield (60min chart)

Australian Dollar, ASX Recouple In Misery As Coronavirus Spreads

Chart created with Trading View

Obviously, Australia is critically exposed to Chinese growth as a major exporter of raw materials to the world’s second largest economy. But it’s also close to various nations in the region, all of which are now apt to see virus-related slowdowns.

It is of course possible that the market may come to rethink its current gloomy take on the likely impact of the virus. Even so, a meaningful decoupling of risk-correlated assets must now be viewed as extremely unlikely for as long as the disease continues its gloomy world tour.

AUD/USD MIXED
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 3% 12% 7%
Weekly 23% 5% 14%
What does it mean for price action?
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--- Written by David Cottle, DailyFX Research

Follow David on Twitter@DavidCottleFX or use the Comments section below to get in touch!

https://www.dailyfx.com/free_guide-tg.html?ref-author=Cottle.

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