- AUD in fresh losses

- Markets unconvinced by central bank action

- RBA to announce programme of quantitative easing

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The trend higher for Pound Sterling against the Australian Dollar is firmly intact at the start of the new trading week that sees yet further substantial losses for global stock markets and other assets associated with risk.

The Australian Dollar is one such 'risk on' asset; tending to rise when markets are rallying and the global growth outlook is positive, while falling when markets sell off in times of investor anxieties.

Investor anxiety is in full display on Monday, March 16 with substantial drops being recorded on the world's main exchanges, at the time of writing no major western stock market index is recording losses of less than 5%.

Australia's ASX 200 index has now plummeted in the region of 40% since the highs of February - a fall aided by the eye-watering 9.7% plunge witnessed on Monday - a selloff that has corresponded with an outflow of foreign capital from Australia which has added to Australian Dollar downside pressures.

The Australian Dollar, true to its correlation with risk sentiment, is broadly lower in sympathy with the global investor retrenchment:

The Pound-to-Australian Dollar exchange rate is presently quoted at 2.0074, up 0.95% from when markets opened on Sunday night and up 6.0% for 2020 as a whole. The Australian-to-U.S. Dollar exchange rate is meanwhile at 0.6130, down 0.90% on Sunday's open and down 12% in 2020.

Global markets remain pointed lower despite a raft of central bank measures announced over the weekend to combat the economic downturn sparked by the ongoing spread of the coronavirus. Cuts from the Federal Reserve, Reserve Bank of New Zealand and an expansion of quantitative easing by the Bank of Japan have thus far failed to convince markets central bankers have the answers to what is clearly a global economic slump sparked by a medical emergency.

"If we wanted another reminder that monetary policy has failed as a tool to combat market pessimism, this weekend’s Fed bazooka has provided exactly that. Despite an almost unprecedented easing package that took rates to near zero and implemented a fresh QE programme, US markets are currently set to open limit down later today. With governments and central banks running low on bullets, markets will soon run out stimulus announcements that have sought to shake off the current bearish sentiment permeating through financial markets," says Joshua Mahony, Senior Market Analyst at IG.

Turning to the specifics impacting the Australian Dollar, the Reserve Bank of Australia (RBA) announced earlier it stands ready to commence a programme of quantitative easing and purchase Australian government bonds to support the smooth functioning of domestic secondary bond markets.

"The quickly developing situation likely leaves the room open for a plethora of other monetary policy measures to be announced this week. Even though markets are positioned for some unconventional monetary measures, the risk of a more aggressive easing plan may add more negatives to the AUD," says Francesco Pesole, FX Strategist at ING Bank.

This comes on top of the RBA's existing efforts to ensure the financial system continues to operate smoothly via their Repurchase Operations (Repos).

"In the meantime, to provide liquidity to Australian financial markets, the RBA will also be conducting one‑month and three‑month repo operations in its daily market operations, with six‑months maturity or longer at least weekly," says Elias Haddad, Senior Currency Strategist at Commonwealth Bank of Australia.

In a bid to counter possible funding crunches as investors panic over the coronavirus, the RBA on Friday pumped $5.6BN into the financial system via repurchase operations, which is more than twice the amount it had originally intended.

Global bond markets have come under pressure amidst the broader market meltdown, with reports from Australia that foreign holders of Australian government bonds are selling to repatriate cash to where they are domiciled. This forces the yield on Aussie bonds higher, creating cash crunches in the domestic market.

During Repo operations the RBA steps in to temporarily buy government bonds from main dealers, such as banks, and in the process they injected temporary liquidity into the market.

However, the promise of quantitative easing would see the RBA hold onto bonds for longer periods of time, thereby boosting liquidity on a more sustained basis.

However, one of the side effects of central bank quantitative easing tends to be the weakening of the currency issued by that central bank; for this reason we would expect the current ongoing trend of Aussie Dollar weakness to extend further.

"The RBA will announce further policy measures to support the Australian economy on Thursday (Sydney time). We expect the RBA to cut the cash rate to the lower bound of 0.25% and announce the details of an asset purchase program that will involve purchasing Australian Commonwealth Government Bonds (ACGBs)," says Haddad.

CBA also expect the RBA to set target levels for ACGB yields as opposed to announcing an intention to purchase a specified quantity of bonds.

We would imagine that the general trajectory for the Aussie Dollar over coming days and weeks will be lower so long as the global coronavirus outbreak continues to spread; we would expect the seeds of a market recovery to be sowed once major economies start to report a turnaround point in infections which would in turn suggest the worst might have passed.