TGIF everyone. Before we begin, I'll take this chance to remind you that Valentine's Day is next Friday. If you want to load up on brownie points, get in and book that restaurant now. With that out of the way, let's chat about the Aussie dollar’s performance after its abysmal fall last week. While the value of the AUD has improved since we last spoke on Friday, it is still witnessing some downward pressure as a result of strength in the USD, and the ongoing concerns stemming from the Coronavirus. With this in mind, one Aussie dollar will buy you:
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What impacted the Aussie dollar this week?
Coronavirus Concerns and China
Earlier in the week, Bloomberg reported that the Chinese government had started clinical trials on Coronavirus drugs. This comes alongside the growing evidence surrounding the Coronavirus' impact on global manufacturing supply chains and tourism. So far, the following changes have been made as a result of the Wuhan virus:
- Korean car manufacturer Hyundai has shut some production locations
- Tesla and Airbus have closed their Chinese factories
- Starbucks has closed its doors on stores in China and Hong Kong
- Several airlines have stopped or limited flights bound in or out of China and Hong Kong
Australia is a top-rated destination for Chinese tourists, with almost 1.42million Chinese nationals visiting our shores last year. As the virus continues to quell flights and outbound travel for the Chinese population, there could very well be a noticeable impact on the Australian tourism industry. Further, our economy is intrinsically linked to China due to our strong trade ties, so any significant dents in Chinese economic growth can carry through to the value of the Australian dollar. Today China is releasing their January trade balance figures, which will be our first glimpse into the impact of the virus on their economy.
Virus aside, the Chinese government announced they are halving the tariff rate on US$75bn worth of imports from the USA on February 14th. Now that's a lovely Valentine's day gesture! This decision will boost the Chinese economy as they won't need to pay as much tax, will help the US economy as they can export more to China, and will helpfully lessen the blow of the Coronavirus. Fingers crossed!
The USD reached its February high this week as financial markets rebounded from last week's drop. Markets are now waiting for the January Non-Farm payrolls report to be released, and expect it to be similar to the month before. If the data is above estimates, the USD will receive even more support, further pushing down on the value of the Aussie dollar. Should it be lower than expectations, the opposite will occur in favour of the AUD.
On Tuesday the Reserve Bank of Australia met and decided to keep interest rates on hold for February at 0.75%. Markets generally expected this, however, it still gave the AUD a tiny boost as a result. Unfortunately, this boost was outweighed by the strong USD overnight.
RBA governor Philip Lowe spoke earlier this week, acknowledging the "very large" economic impact of the bushfires on the directly affected areas that will need to rebuild. While this impact will be mirrored in December 2019 and January 2020 GDP numbers, it should not affect overall GDP growth for 2020. Hopefully, this is the case, as the Aussie economy can't really afford to take another hit.
Governor Lowe is also scheduled to give a statement on Monetary Policy later today. Markets expect he will reinforce the fact that the RBA is in no rush to cut interest rates any time soon.
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