- AUD gains over all other than CAD after RBA repricing.

- Fading coronavirus fears aid AUD to top spot this week.

- But the virus' economic impact is already becoming clear.

- Is leaving AUD/USD vulnerable to correction, CBA says.

- Westpac looks for falling commodities to road-block AUD.

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The Australian Dollar was flying close to the sun Thursday because a repricing of the Reserve Bank of Australia (RBA) outlook has left the antipodean unit vulnerable to the already-observable impact of the coronavirus that’s crippling China’s economy.

Australia’s Dollar rose against all major rivals except the oil-sensitive Canadian Dollar Thursday and is the best performer of the last week. It’s been lifted by a cheery assessment of the economic outlook from the RBA that’s led markets to abandon bets the bank would slash the cash rate for a fourth time this quarter.

“Tonight, AUD will take some further direction from RBA communications. RBA Governor Phil Lowe gives his semi‑annual testimony to the Parliament committee (10:30pm London) and a few hours later the RBA will release the quarterly Statement on Monetary Policy (12:30am London). The risk is the AUD strengthens further if the RBA reiterate that the economy is at a gentle turning point despite the recent increase in downside risks,” says Kim Mundy, a strategist at Commonwealth Bank of Australia.

Above: Australian Dollar performance against major rivals in last five trading days. Source: Pound Sterling Live.

The Aussie has been aided of late by fading concerns over the spread of coronavirus, with National Health Commission number suggesting growth in the number of infections and deaths has fallen from around 30% per day last week to just 15% this week.

There are many unanswered questions about how big the problem is inside China but when the lower official growth rate is considered alongside that the number of cases in other countries has remained low, markets have found cause to breathe a sigh of relief.

But that respite could soon be brought to an end by the increasingly apparent impact the epidemic is having on China’s economy as well as the international supply chains of major retailers across the world. And if markets were to begin fearing the worst on the global economic front it would be bad news for the Yuan-correlated and commodity-underwritten Australian Dollar.

Above: AUD/USD rate shown at daily intervals.

“There is mounting evidence that the coronavirus is negatively impacting on global manufacturing supply chains, as well as tourism flows. Korean car maker Hyundai, and Korean car parts suppliers have shut some production facilities because of a dearth of supplies from China. Like tourism, manufacturing is labour‑intensive and strict controls on labour movements in China have created widespread production bottlenecks,” Mundy says. “Further, Airbus and Tesla, among others, have shut Chinese factories and warned of production delays. Starbucks has closed outlets and numerous airlines have halted or reduced flights...The implications from slower Chinese growth is slower global growth, and further downward pressure on AUD/USD.”

Expectations of more rate cuts and an eventual turn to quantitative easing at the RBA had weighed heavily on the Aussie for months although this week the bank not only eschewed a rate cut but also suggested strongly that it doesn’t intend to provide any more stimulus to the economy in the short-term. That’s prompted the market-implied RBA cash rate for August 04 to rise from 0.40% at the end of January to 0.53% on Thursday, taking the Aussie up with it.

However, January’s losses for commodity prices have reduced the ‘fair value’ of the Australian Dollar sharply, according to financial model estimates from Westpac. And when the reduced valuation is combined with recent gains for the exchange rate the Aussie is in danger of appearing overvalued and “expensive.”

Above: AUD/USD rate shown at weekly intervals.

This is at a time when interest rate markets don’t appear to be pricing any economic growth or monetary policy fallout from the coronavirus.

“It seems just a matter of time before we see ‘a sudden stop’ in commodity demand from China. Rates for ‘Capesize’ bulk ships have already dropped to record lows and we expect to see that feeding through in our physical shipping activity models soon. This should keep a lid on commodity currencies,” says Robert Rennie at Westpac. “We took profit on our short AUD from 0.6950 on the dip through 0.6700...While the A$ could push higher near term given guidance from Lowe that they are taking the ‘long view’ on the impact of bushfires and coronavirus, we doubt that we will see much strength above 0.68.”

Rennie and Westpac colleagues say the RBA is too optimistic in looking for growth of 2.75% this year and that the actual outcome is likely to be closer to 1.9%. Furthermore, the jobless rate is tipped to climb and the RBA is expected to cut the cash rate in August, which is why Westpac expects the Aussie to be stymied by its nearby 0.68 'fair value' boundary against the U.S. Dollar.