Apr 02 2020
Amid heightened global panic surrounding the COVID-19 pandemic, and its increasingly dire impact on the global economy, investors have fled the AUD in droves. The Australian dollar plummeted in March 2020, with the exchange rate reaching an 18-year low of $0.55. In foreign exchange markets, the AUD is regarded as a risky currency due to Australia’s strong reliance on the economies of China and the United States.
Why did the AUD collapse in March?
Despite ominous signs of accelerating COVID-19 infections in the United States, global investors have flocked to the USD as a safe haven asset, leading the greenback to surge against most global currencies. Global corporations with debt denominated in USD have been particularly desperate to secure dollars, in an effort to ensure they can meet their financial obligations.
The appreciation of the USD, and consequent depreciation of the AUD, has been highly concerning for central banks globally. Volatile currency markets have added additional strain to the global financial system, which was already struggling to digest a seismic shift in oil prices and rapidly growing quarantine measures.
To exert control over a runaway exchange rate and ensure sufficient supply of USD for Australian firms, the Reserve Bank of Australia and the Federal Reserve of the United States announced an emergency dollar swap line on March 20th. Under this arrangement, the Federal Reserve will accept AUD from the RBA in exchange for USD. The RBA will then lend out USD to Australian firms, ensuring supply of USD and preventing a further downturn in the AUD exchange rate. This measure was last used during the heights of the global financial crisis of 2008-09.
The Federal Reserve also announced similar currency swap arrangements with Brazil, Denmark, Korea, Mexico, New Zealand, Singapore, Norway and Sweden. This provided some much-needed stability to the AUD which recovered from $0.55 on the 19th of March to $0.60 on April 2nd.
The AUD was weak before COVID-19
The Australian dollar has not fallen solely in response to the outbreak of COVID-19. In fact, the Australian dollar has been slowly declining since early 2019. The RBA cut rates in June, July and October 2019. Ongoing trade tensions between the United States and China also contributed to the depressed dollar, given that the Australian economy is closely tied to both countries’ economies. The disastrous bushfire season of 2019-20 also dragged the Australian dollar down, depressing growth forecasts for the economy as well.
What the low AUD means for you
Normally, a depreciation of the AUD would be of great benefit for Australian exporters. By lowering the relative price of Australian exports in foreign markets, a weaker AUD would help the ailing manufacturing sector, assist mineral exports, and drive increased demand from international tourists and university students.
However, the COVID-19 pandemic has led to a very different set of circumstances for Australian homes and businesses. Many local manufacturers are unable to operate amid a lack of supply of production inputs from factories in China. Plummeting business confidence is expected to lead to lower capital expenditure globally, leading to lower demand for manufacturing and mining products. Quarantine measures have effectively shut down the tourism sector. Overall, with only four permitted reasons to leave the home, any benefit of a weaker AUD is expected to be marginal for the remainder of 2019-20.
Outlook for the AUD
IBISWorld expects the AUD to gradually recover in line with global economic activity, as the shock of COVID-19 passes and fear subsides. As currency trader look forwards, demand for the AUD is likely to rise as the global economy moves past the COVID-19 pandemic. When economic growth begins to roll forward once more, the Australian dollar is expected to be a strong performer.
To stay up-to-date on the latest industry insights from our expert analysts subscribe to our monthly e-newsletter!
For more information, to obtain industry reports or to arrange an interview with an analyst, please contact:
Strategic Media Advisor – IBISWorld Pty Ltd
Tel: 03 9906 3647