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Will Australia Ride Out the Turmoil?

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The economic calendar is rather barren for Australia this week, with consumer sentiment data tomorrow among the few relevant events.

That gives free rein for the markets to react to the weekend’s news, COVID-19, and geopolitical fallout. And it might just turn out that the Aussies are in a better position to weather the bumpy road in the markets.

There are several fundamental reasons to suggest that the AUD might be in for better performance going forward.

The market is still processing last week’s torrent of key data. This data was somewhat of a mixed bag, and the market is parsing it in with the latest events.

From that, there are some key takeaways that could show Australia is in something of a unique situation.

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The Next Rate Cut

The only question that remains is whether the RBA will wait until the next meeting to cut rates, or whether it will announce measures ahead of time.

Compare this to money market rate projections in the US and the euro area. These see 75 basis points being cut at the next meeting at the latest.

That the RBA has already cut last week implies they don’t have as much cutting room as other central banks.

The ECB seems happy to plunge into negative rates. And the Fed has not come out opposing them!

The RBA has made it clear that it won’t cut that far. It will instead turn to non-conventional measures if rates reach 0.25%. That’s just 25 basis points away now.

It’s Mathematically Probable

Let’s assume the scenario that the world’s major central banks opt for a “shock and awe” response as traders, analysts and the market are demanding.

Following the next series of meetings, the rates in Australia would match the US’ and be significantly higher than the eurozone. Closing the rate gap with the US would likely support the Aussie, which did a pretty fair job weathering the last major economic downturn.

Widening the rate gap would make Aussie debt a good investment over the euro. We would expect the latter to come under renewed stress with the spread of COVID-19 through the EU, and potential measures to fight it.

Is it Rebound Time?

As China reports resuming factories, demand for raw materials from Australia would be expected to start ramping up as Chinese suppliers try to make up for lost time and fulfill pending orders.

Chinese importers are also expected to take advantage of the lower prices in commodities to snap up bargains.

Australia has managed to keep the spread of COVID-19 to a minimum. There have been just 93 cases so far. In fact, the country has one of the lowest infection rates in the region.

This is very different from the thousands of cases being reported in Europe, prompting major restrictions which could significantly affect the economy.

Keep an Ear to the Ground

Also, Australia imports almost all of its oil. This means it’s likely to see a net benefit in terms of lower production and transportation costs from the fall in the price of crude.

In the early morning, Prime Minister Morrison announced the government was working on a surplus package of AUD5-10B, aimed at supporting employment.

Naturally, the situation could change. Australia could have a major outbreak, or China could not be accurately reporting its return to economic activity. Or perhaps Saudi Arabia and Russia could resolve their differences, and so on.

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