The Australian dollar (AUD) is benefitting from the US Federal Reserves promise of a USD 2 trillion stimulus bill to stabilise the economic disruption caused by Covid-19. The Fed’s announcement boosted risk appetite amongst investors, causing assets that had previously dropped against the greenback to make gains.
As China has begun lifting restrictions in Hubei, a central province, optimism in global markets is increasing, which is also boosting confidence in the AUD currency market. The Australian dollar is heavily influenced by the Chinese economy, so potential signs of economic stability in China will have a positive impact on AUD.
The Australian dollar also drew support from the government’s announcement of an AUD 66 billion economic lifeline earlier this week.
Australian government unveil $66bn support package
On Sunday, the Australian government unveiled an additional stimulus package to provide some ease to the economic shock caused by the coronavirus. The Australian Prime Minister Scott Morrisson announced that the new measures would give financial relief to small and medium-sized businesses, boost income support for workers and release superannuation early.
The second wave of emergency measures comes on top of the AUD 117.6 billion the Australian government had been providing in support. At AUD 189 billion, the total economic stimulus now equates to over 9% of Australia’s GDP.
Financial markets responded somewhat positively to Morrison’s announcement of more aggressive fiscal measures, prompting the Australian dollar to enjoy some relief. However, the majority of the Australian dollar’s gains has been fuelled by the new US stimulus.
US Federal Reserves effect on AUD
The US government has taken more draconian actions to support its economy amidst the coronavirus crisis. On Monday, the White House and the Senate agreed to pass a USD 2 trillion emergency fiscal stimulus which is the largest economic rescue package seen in history. The move has strengthened market liquidity and calmed market panic over the coronavirus pandemic. As a result, investors are turning away from safe-haven currencies like the US dollar and the (EUR) euro to risk-on currencies such as the British pound and the Australian dollar.
The Australian dollar is in strong demand as it aligns itself heavily with risk sentiment, so signs of improvement in the global market cause it to rebound strongly. AUD/USD made bullish gains trading up 1.56% on the day at 0.60532 (at time of writing), and the Australian dollar has also stood its ground against Sterling.
However, a potential recession in Australia will weigh down heavily on long-term gains. The impact of the coronavirus on the Australian economy is expected to be severe as the government looks to impose tighter restrictions and provide more economic aid.
According to Woldometer, as of 17:00 on March 26th, there have been 2,806 confirmed coronavirus cases and 13 deaths recorded in Australia. If the death toll continues to rise and economic activity is further reduced, the risk-sensitive Australian dollar is likely to fall as investors will flee back to safe-haven currencies. Experts have warned that Australia could see cases spike to 50,000 by April which would have a detrimental impact on the AUD currency market.
GBP/AUD outlook after Bank of England interest rate decision
The Australian dollar is benefitting from US dollar weakness, causing GBP/AUD to trend lower than its opening week level of 2.04040. After dropping significantly on Monday, the GBP to AUD has stagnated and the pound to Australian dollar exchange rate is now trading in the region of 1.9949 (at time of writing).
Any pound to Australian dollar gains is also looking limited following the Bank of England’s (BoE) discussion on monetary policy. The BoE decided to freeze interest rates and warned of the coronavirus’s long-term damage to the British economy. BoE officials identified that the UK could face a recession in the early part of 2021 as the effects of lockdown become more apparent.
The BoE also announced that they would be freezing these interest rates for a year, which under normal circumstances would have seen sterling depreciate but the pound has remained resilient.
Traders will now be focusing on Rishi Sunak’s new wave of emergency support before making any big moves on GBP. Sunak’s fiscal stimulus will attempt to offset any significant damage caused by a recession such as widespread job losses and business closures.