AUD Remains Under Pressure Due to Fears of a Second Wave

Ibeth Rivero

The Australian economy is experiencing its biggest downturn since the 1930s, however, it is possible that such a downturn "will be shallower than earlier expected”.

Last week the Australian dollar lost 0.44 percent against the US dollar, decreasing for the second consecutive week amid the bearish pressure caused by the fears for a second wave of the Covid-19 pandemic.

Last week China decided to put Beijing under what the media called "soft lockdown" because of the sudden increase in coronavirus cases. It is believed that the new outbreak is focused on the Xinfadi wholesale food market, and since the government announced the first case of the new outbreak at least 184 new cases have been reported, which pushed the government to bring up their official emergency response to level II just 10 days after easing down the measures and diminishing the emergency response to level III.

This means that the government is now shutting down communities that are near the food market, carriers are canceling flights to and from Beijing, schools are being told to suspend their activities and certain businesses and public spaces will have to operate around 30% of their capacity.

Other countries are also reporting spikes in infections, among them the United States, India, and Israel, spreading the fears for a new lockdown, which could hinder the heavily expected economic recovery. At the moment, there are about 8,923,822 infected individuals worldwide, as well as a death toll of 466,901.

CoronavirusAustralia itself is experimenting with an uptick in coronavirus cases. Last week, Victoria reported 116 new cases, which is an important increase given the fact that cases only increased by 35 on the previous week. This increased doubts about whether Australia would continue with easing the lockdown, but recently the federal Deputy Chief Medical Officer Nick Coatsworth said that every state will deal with the restrictions based on what their local epidemiology dictates.

"It would be unreasonable for WA or the Northern Territory or, indeed, Queensland at the moment to be making decisions on their restrictions … with a close eye on what's going on in Victoria because the epidemiology is different," he explained.

According to the OECD, the Australian economy is expected to contract by 5 percent this year and could fall 6.3 percent if there is a second wave of the virus. In the first quarter, the economy contracted 0.3 percent, confirming that the country has entered into an economic recession.

Last week the economic calendar brought up interesting information about how the Australian economy is currently doing. On Tuesday, the Reserve Bank of Australia published the minutes of its latest monetary policy meeting. In them, the bank's committee claimed that despite the fact that the Australian economy is experiencing its biggest downturn since the 1930s, it is possible that such a downturn "will be shallower than earlier expected”. On that same day, the Australian Bureau of Statistics published the house price index, a well-known proxy for inflationary pressure, which showed an increase of 1.6 percent, which was below the analysts' expectations and lower than the last figure, which stood at 3.9 percent.

On Wednesday we learned that May's Westpac- Melbourne Institute Leading Index remained at levels that are consistent with an economic recession, rising from -5.08 percent in April to -4.79 percent in May. April's HIA New Home Sales showed a further deterioration in the housing market, falling 4.2 percent after dropping 1.1 percent in March.

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On Thursday we got May's labor market figures, which showed how Australia lost around 227,000 jobs, leaving the participation rate at 62.9 percent and the unemployment level at 7.1 percent. 52 percent of the jobs that were lost in may were lost by women, while young people lost 45 percent of the jobs.  Australia's PM Morrison highlighted that those job losses were "devastating".

May's retail sales figure ended up being positive, as it showed how Australian businesses and consumers are coming back to normalcy, given the easing up of restrictions. Retail sales increased by 16.3 percent, the biggest month-to-month rise in 38 years, and after falling 17.7 percent on the previous month.

Despite the positive data we got at the end of the week, the Australian dollar closed on the negative territory, losing 0.26 percent on Friday's session. It seems that fears for a second wave of the epidemic in China have been weighing more on the Australian dollar's performance. The diplomatic relationship between China and Australia is also getting tenser, especially after Australia demanded transparency from China regarding the origins of the epidemic.

Ibeth Rivero

Ibeth contributes daily market commentary in both English and Spanish (both of which she speaks fluently) and she also manages the DailyForex mobile app to ensure that traders around the world are getting important market updates in real time.

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