- AUD advances ahead of AU government fiscal stimulus on Thursday.

- Reports suggest up to 1% of GDP to be spent on support to economy.

- And as coronavirus hits 117 countries and WHO declares a pandemic.

- Preventative fiscal stimulus best weapon against lasting virus damage.

- But analysts divided in outlook for AUD amid shaky financial markets.

Image © Desiree Caplas, Adobe Stock

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The Australian Dollar edged higher against most major rivals Wednesday as the government prepared to unveil a major stimulus package intended to support Australia's economy through the coronavirus outbreak, but analyst opinion is divided on the outlook for the antipodean currency.

Australia's unit was higher against all majors other than the New Zealand Dollar and Swedish Krona Wednesday after Prime Minister Scott Morrisson confirmed the government will announce relief for businesses and households as they navigate the coronavirus crisis that risks disrupting employment as well as the supply of goods and customers. The Pound-to-Australian Dollar rate was -0.57% lower at 1.9738 amid strength in the Aussie

Speculation about the size of the stimulus package has continued, with The Australian reporting it could be worth up to $18 bn and others saying $20 bn, with both amounts being close to 1% of GDP. This was after Reserve Bank of Australia (RBA) Deputy Governor Guy Debelle said that lower tourist and foreign student numbers could shave as much as 0.5% off first-quarter GDP on their own, and that's before any impact elsewhere in the economy.

"Talk of the town is QE, but fiscal is the more important signal Down Under and will soon be on its way. Still, it is too early to call a bottom on the risk that the market has yet to absorb the possible scale of the hit to the global growth outlook this year," says John Hardy, head of FX strategy at Saxo Bank.

Above: Australian Dollar performance Vs major rivals Wednesday.

Debelle also reiterated the RBA would be willing to experiment with quantitative easing if it becomes necessary, which didn't faze the Aussie on the day but could have serious adverse consequences for the currency if implemented. But with central bank support limited by the earlier low level of interest rates and bond yields, preventative fiscal support might be just about the only effective defence against lasting virus-induced damage to economies.

And the fact that some countries are implementing that fiscal policy, while others are not, might explain at least in part why the Aussie, New Zealand Dollar and Sterling were among the top performers on Wednesday and the U.S. Dollar was a notable laggard. Australia, New Zealand and the UK have either announced or are about to announce significant support packages, while politics have hampered progress toward a stimulus in the U.S.

"We continue to think that FX markets are likely to reward currencies where the authorities are willing and able to act to counter the macro risks presented by the viral outbreak," says Ned Rumpeltin, European head of FX strategy at TD Securities.

Fiscal stimulus expectations and lesser losses in markets for other risk assets like stocks have put a floor under the Australian Dollar since Tuesday, although analyst opinion is divided over whether the nascent resilience can last. Saxo's Hardy says the threat to risk assets remains acute, and the Aussie's reaction to this week's declines in stock markets is evidence that the antipodean currency is still vulnerable to risk aversion among investors. But others are tentatively optimistic in their outlook.

"We continue to view the spike low seen to 0.6312 as the end of the move with the market consolidating near term. To confirm the low is in place, however, a close above the .6671 October low is needed. This will alleviate immediate downside pressure and target the 200 day ma at .6829. This guards the .6933 January high," says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank.

Above: AUD/USD rate shown at daily intervals.

Markets have focused on government fiscal support as Italy's 60 million citizens spend their second day under a draconian 'lockdown' that threatens more damage to an already-contracting economy as it battles an epdimic that led Australia to close its borders to the country on Wednesday. And nobody yet knows the impact that such measures already had in China this quarter, although a severe contraction is expected when the data is released in April.

And with outbreaks now underway in many of the world's major economies, policymakers have grown worried, leading central banks including the Federal Reserve, Bank of Canada, RBA and Bank of England to cut interest rates sharply this last week. The BoE was the latest to join the rate cutting club Wednesday when it cut Bank Rate back to its 2016 record low of 0.50%, threw cheap cash at the banking sector in order to support lending to the real economy and pledged to act in "concert" with HM Treasury.

"The Budget that has delivered a package of GBP30bn to support UK with timely, temporary and targeted policy responses against the impacts of COVID-19, which are seen as severe but not long lasting," says Tim Riddell, a London-based strategist at Westpac. "After an initial dip on the surprise 50bps Cash Rate cut, GBP did lift as the impact of the BoE’s actions filtered into markets. However, the net move on the day was minimal as currencies reflected a broader sense of global risk sentiment."

The BoE's 50 basis point rate cut and other measures are said to be worth up to 1% of GDP while HM Treasury announced as part of its budget on Wednesday around £30 bn of support including tax reliefs, grants for some small businesses and a plan to underwrite 80% of the value of coronavirus related loans to the private sector. That was in addition to an increase in medium and long-term investment commitments that could boost the economy beyond 2020.

"The UK has taught Washington and Berlin a lesson in how to respond to this crisis. Markets want more of this dual fiscal and monetary response but few are able to do it the way Britain has – the US legislature and executive are totally at odds, while Europe has no fiscal union," says Mark Wilson, chief market analyst at Markets.com. "Merkel and Lagarde seem to be coming to agreement, but the proof of the strudel is in the ECB meeting tomorrow."

Above: Pound-to-Australian Dollar rate shown at daily intervals.