- AUD rises at start of new week

- RBA response to coronavirus key to the outlook

- Market brings forward RBA rate cut expectations

Image © Adobe Images

- GBP/AUD spot rate: 1.9592, -0.33%

- Bank transfer rates (indicative): 1.8906-1.9043

- FX specialist transfer rates (indicative): 1.9350-1.9416 >> More details

Global central banks look ready to step in and mitigate the impact of the coronavirus outbreak, a move that has buoyed global markets and the risk-sensitive Australian Dollar on Monday.

All eyes will now turn to the Reserve Bank of Australia (RBA) who deliver their latest monetary policy decision on Tuesday. The Bank's response to the coronavirus outbreak - which prompted a severe bout of selling in global stock markets last week - will be key to how the currency trades over the short-term.

Ahead of the RBA event, the Australian Dollar is looking supported courtesy of signs that the outbreak in China remains under control and the outbreak in Italy appears to have stabilised. The Pound-to-Australian Dollar exchange rate is quoted lower than where it closed he previous week at 1.9652, the Australian-to-U.S. Dollar exchange rate is quoted at 0.6532, 0.26% higher. If this is the case, the RBA might not have to resort to cutting interest rates in the near-future, which could prove supportive for the currency,

Aiding global investor sentiment are signs that global central bankers are willing to step in and provide support if need be. In a rare emergency statement, Bank of Japan (BOJ) Governor Haruhiko Kuroda said the central bank would take necessary steps to stabilise financial markets: "Overseas and domestic financial markets continue to make unstable movements due to heightening uncertainty over the impact on the economy from the spread of the coronavirus."

"The BOJ will monitor developments carefully, and strive to stabilise markets and offer sufficient liquidity via market operations and asset purchases," he added.

The move follows that of Federal Reserve Chairman Jerome Powell who signalled on Friday a readiness to cut interest rates to cushion the economy against the effects of a widening global slowdown and potential health emergency due to the spreading coronavirus.

While the fundamentals of the U.S. economy remain strong, "the coronavirus poses evolving risks to economic activity,” Powell said in a statement released Friday afternoon. "The Federal Reserve is closely monitoring developments and their implications for the economic outlook".

We would expect the RBA to offer a similar message of support.

The extent to which the RBA signals support for the domestic economy via interest rate cuts could well have a bearing on the value of the Australian Dollar. An aggressive stance would potentially trigger falls in the currency as is often the case when central banks embark on a cycle of interest rate cuts.

However, the RBA signalled a sanguine approach in their February meeting and we wonder just how difficult it will be to shake the RBA's stance; the risk is the RBA maintain their sanguine approach which could aid the Aussie Dollar higher.

The RBA will however surely have to acknowledge domestic developments as the country over the weekend confirmed its first case of person-to-person transmission, according to ABC.

It is believed to have been transmission from a patient to a doctor in New South Wales.

Previous patients with the virus had caught it overseas.

Australia has now confirmed 29 cases of the virus with one death reported.

Evidence of panic buying in anticipation of a severe outbreak of the disease became apparent this weekend, with some shops selling out on stock of essentials such as toilet paper, hand wash, tissues and Panadol.

Woolworths supermarket in Northbridge (Sydney) at 3pm on Monday. In order top left to bottom right: empty shelves including toilet paper, hand wash, tissues and Panadol. pic.twitter.com/MXr1SreH2F

— Alison Rourke (@AlisonRourke) March 2, 2020"The market has brought forward an anticipated cut by the RBA. Previously it had been discounted for near mid-year. The derivatives market is has priced in about 20 bp of a cut (~80%) now. A week ago, less than three basis points were discounted," says Marc Chandler, Managing Director, Bannockburn Global Forex.

Chandler says the Aussie Dollar has also lost its interest rate premium, courtesy of a series of rate cuts in 2019 that now leave the base rate at 0.75%, on a par with the UK. Capital tends to flow to where interest rates are higher and Australia's historically high basic interest rate has for years been a source of support for the currency.

Further rate cuts in response to a potential global slowdown - driven by the coronavirus outbreak in China - would likely add further downside pressures on the Aussie Dollar.

"The reason Australia has been able to avoid a recession for more than 20 years has a great deal to do with the rise of China. Its exposure is now a significant liability, and this is on top of the devastating fires," says Chandler.

China over the weekend meanwhile released data that showed containment measures enacted at the start of January had severely restricted economic activity. The Composite PMI - which gives a snapshot of economic activity for February - fell to a record low of 28.9, having been at 53.0 in January.

During the financial crisis of 2008 the activity indicator only went as low as 38.8.

The real risk for those holding stocks, and indeed for the Aussie Dollar, is that this slowdown persists into March and other economies start to show contagion.

Emirates has reported a significant drop in business as would-be travellers opt to stay at home which is a clear signal that the global economy could be in for a slowdown. An internal email to employees at the airline said: "A particular challenge for us right now is dealing with the impact of Covid-19.

"We've seen a measurable slow-down in business across our brands and a need for flexibility in the way we work."

However, Asian markets started the new week by registering some gains in a sign that the hefty sell-off of the previous week might now have run its course, but we expect investors to remain highly sensitive to developments.

"There has been a real effort to get the economy moving forward, and the worst of the shutdown is likely passed. Since the data confirms, more or less, what investors had envisioned from photos and anecdotes, there may not be an adverse reaction to the news," says Marc Chandler, Managing Director at Bannockburn Global Forex.

There has been a decrease in new cases reported in South Korea and the outbreak in Europe's hotspot of Italy appears to remain unchanged.

If the worst has indeed passed, the Australian Dollar might find its outlook improving.

A bellwether of the outbreak for global markets has been tech giant Apple who warned in mid-February that the outbreak would impact revenues, a move that sent shudders through Wall Street and ultimately laid the groundwork for a substantial market sell-off.

This past weekend has meanwhile seen Apple say its factories in China are reopening, “China is getting the coronavirus under control,” said CEO Tim Cooke. To what extent this triggers a fresh rethink on the outbreak will take some time to become clear.