The Australian dollar has come under a sudden bout of pressure as a second wave of the Coronavirus has been recorded in Beijing. The development has seen the Australian dollar suddenly reverse some of its incredible gains that is has made in recent weeks. Rates for GBP AUD increased by over 1% yesterday to a high of 1.8425 on the back of the news. What is striking is that all of the new cases in China have been linked to a major wholesale food market.
Beijing had not seen a rise in cases for almost two months until 4 days ago and since then the total number has increased to 51. Similarly, in the US there has also been a spike in new cases which raises concerns for the global economic recovery. The total number of new US cases reported on Saturday reached 25,000. The news is a big disappointment as economies are currently trying to re-open as quickly as possible after 2-3 months of lockdown.
As the last two months has shown, the Australian dollar has proven very reactive to risk sentiment with gains in excess of 20% against the US dollar. The question now is whether the Australian dollar has peaked and is moving away from its recent lofty heights. The Australian dollar is so susceptible to risk sentiment due to its strong trade relationship with China so any major changes in the US or China in particular can have a sizeable impact on the Australian dollar. In short when the going is good in China as well as the world economy, or is at least expected to be, then the Australian dollar should be performing best. Whilst Australia has been hit less hard domestically by Covid-19, the Australian dollar remains very sensitive to all the latest Coronavirus developments.
The US Federal Reserve yesterday announced a package of bond buying and the Australian dollar saw a short-lived bounce on the back of the news. The Fed said: “it would begin buying a broad and diversified portfolio of corporate bonds to support liquidity and the availability of credit for large employers”. The news helped see a rally in stock markets as confidence was boosted. Whilst there is an improved confidence in the US Federal Reserve President Robert Kaplan has said: ‘the US will have a significant, historic contraction in the second quarter and we may have reached the peak of unemployment. Whilst he expects the US outlook to improve at the end of 2020 there are still question marks hanging over the US and global economic recovery.
Super Thursday – Will the Pound Strengthen Against the Australian Dollar?
Brexit continues to be a major driver for pound to Australian dollar exchange rates and developments this week could have sizeable impact on the pairing. An important two day EU summit commences on Thursday and any statements that are made from political leaders from the UK or EU could have a sizeable impact on the GBP to AUD pairing. For the time being the rhetoric from the government is that there will be no extension to the transition period and this was reinforced last week when UK cabinet minister Michael Gove formally said there would be no delay.
Boris Johnson met with European Council President Ursula von der Leyen yesterday and hinted that he would like to see a Brexit deal agreed in July. He added that he believes the EU would rather delay things until the Autumn. His comments are important ahead of this EU summit and any further developments or suggestion that a deal could be possible could have a material impact on GBP to AUD
The Bank of England will meet on Thursday for the latest interest rate decision where it is widely expected that the central bank will add more stimulus by way of quantitative easing. An expected £100 billion or even £150 billion will likely be offered to try and keep the economy afloat and banks lending. The British economy shrunk by a staggering 25% in March and April, the lowest on record. With social distancing rules still in place it remains difficult for businesses to operate normally. Such injection of stimulus has historically proven negative for the price of sterling although whether the markets negatively this time around remains to be seen. The pound has had a rough rise against most currencies over the last few weeks.
The Financial Times has reported that the government is seeking to relax the 2-metre self-distancing rule to just 1 metre to try and get the hospitality sector back up and running. The 2-metre rule is preventing many pubs and restaurants from even considering reopening. UK stores reopened on Monday this week after 83 days of lockdown.
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