The Australian dollar is rallying for a 2nd day in today’s trading session, seemingly brushing off the current turmoil in financial markets caused by the plunging oil prices but some see the strength in the Aussie currency as temporary due to a number of other factors.
Although the Australian economy is not tightly connected to oil, there are a number of other industries that the country relies on which have been decimated by the effects of the coronavirus and the longer this problem drags on , the worse it will be for the economy and ultimately the Australian dollar.
"The A$ isn’t traditionally seen as being at much risk from low oil prices given that Australia is a net importer of crude. But LNG is now our 3 export and its price is tied to oil. Moreover, coal prices are being dragged down by the oil rout. Iron ore (Australia’s biggest export) is proving resilient but the other 2 exports in Australia’s top 5 are education and tourism, which face an incredibly difficult year," says Sean Callow, a strategist at Westpac.
There are some encouraging signs according to Mr Callow with regards to the coronavirus with the number of new cases dropping by the day but even this won’t be enough to undo the damage caused by the virus and the troubles are going to last well into next year
"Australia’s Covid-19 trends remain encouraging, with just 7 new cases yesterday and 74 total deaths. But tight restrictions on a range of domestic activities are likely to remain at least for weeks and border restrictions will remain for much longer, crushing tourism and education and slowing population growth substantially into 2021," Mr Callow added.
All businesses big and small have taken a massive hit due to the restrictions placed on peoples lives during the coronavirus lockdown and earnings reports due out soon from various companies are likely to paint a stark picture of the business situation which will also take its toll on the Australian dollar
"The risk of a reality check from incoming corporate earnings and guidance, and the likely duration of Covid-19 containment strategies, suggest the AUD is at risk of a drop back below 0.60 during Q2," says Ray Attrill, Head of FX Strategy at NAB in Sydney.
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