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Australian Dollar May See Some Virus Respite if RBA Can Stay Upbeat

Australian Dollar May See Some Virus Respite if RBA Can Stay Upbeat

2020-02-01 02:00:00
David Cottle, Analyst
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AUDUSD 4-Hour Price Chart

Fundamental Australian Dollar Forecast: Neutral

  • The Australian Dollar is heavily weighed down by virus-linked risk aversion
  • However, it has already fallen a long way
  • If domestic interest rates stay on hold there could be some support for it this week

Tuesday will bring the first 2020 monetary policy decision from the Reserve Bank of Australia, and market pricing has moved considerably against a reduction in the past few days. However, the battered Australian Dollar may not see much benefit from a decision to hold as the spread of coronavirus stacks the deck against such risk correlated assets.

For much of January a quarter-point cut in the record-low 0.75% Official Cash Rate was held to be quite likely according to market pricing data from index provider ASX. However, some relatively strong economic numbers in the last couple of weeks have seen the market move to back no-change by a 70-30 margin.

That makes sense at face value. Headline employment came in extremely strongly and inflation accelerated for a fourth straight quarter even if it remains below target.

But there were considerable devils in the detail. Part-time jobs accounted for all of December’s impressive labor-market gains and underlying pricing power remains almost entirely absent. But, for now, the market seems to have decided that the RBA’s thesis of gentle improvement stands.

Of course, the RBA might just spring a surprise and cut anyway. A 30% chance of such action is hardly negligible. The coronavirus outbreak would give it all the cover it needs for a precautionary reduction in borrowing costs.

Even if it doesn’t, the Australian Dollar is in some trouble. AUD/USD is back to lows not seen since last October, with 2019’s eleven-year lows beckoning just below the market.

AUDUSD Price Chart

It seems highly unlikely that the currency is going to snap back until the coronavirus outbreak is contained and the economic hit it will deal to China and the wider world economy is known.

With that in mind it’s extremely hard to get bullish on the Aussie, but the RBA may just buy it a little breathing space assuming it does hold rates and stick to its gradual recovery thesis. It’s a neutral call this week, but perhaps a low-conviction one.

AUD/USD MIXED
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of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 7% 27% 12%
Weekly 7% -13% 1%
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!

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