Australian, New Zealand dollars downtrodden as funds flee virus risks

[SYDNEY] The Australian dollar was lying near 11-year lows on Thursday as the nation's exposure to global trade and tourism flows made it the whipping boy for investors hedging coronavirus risks.

News that the United States might have the first case of community spread Covid-19 combined with the rapid spread of the disease in South Korea slugged stock markets anew on Thursday and shoved local bond yields toward all-time lows.

That left the Aussie downtrodden at US$0.6554, having shed 0.9 per cent overnight to a fresh 11-year trough of US$0.6542. There was now little in the way of chart support until a US$0.6280 low from March 2009.

The New Zealand dollar likewise slipped to its lowest since October at US$0.6284 and looked set to test support around US$0.6240.

"We continue to believe AUD/USD can test US$0.6500 in the near term because of concerns the coronavirus will slow the global economy," said Joseph Capurso, a senior currency strategist at CBA. "Pricing for RBA rate cuts is also bearing down on AUD."

Investors have aggressively ramped up bets on policy easing in recent days, both in Australia and across the globe.

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Most still doubt the Reserve Bank of Australia (RBA) would ease at its policy meeting next week given it had only recently argued for a period of stability and it was far too soon to gauge the full impact of the virus domestically.

Yet the implied probability of a cut to 0.5 per cent in April has steadily grown to 40 per cent, while a move in May is put at 68 per cent. June is almost fully priced in and the chance of a further cut to 0.25 per cent is priced as a 50-50 bet.

Australian government bond futures have been rallying for more than a week lifting the three-year bond contract to 99.425, not far from the record top of 99.460.

The 10-year contract added another 4 ticks on Thursday to reach 99.1250, implying a yield of 0.8750 per cent.

Domestic data again underlined how vulnerable the economy was even before the virus hit. Business investment fell 2.8 per cent in the December quarter, when analysts had looked for a rise of around 0.4 per cent.

The news from New Zealand was also sobering with business confidence dropping in January.

The country's finance minister said the government might need to step in with immediate fiscal stimulus if the virus outbreak became a global pandemic and tipped the global economy into recession.

All of which has led the market to price in a greater risk of a rate cut from the Reserve Bank of New Zealand (RBNZ) even though it removed an easing bias earlier this month, saying the economy was "in a good place".

Markets imply a 60 per cent probability of an easing by May, and are fully priced for a quarter-point cut by August.

REUTERS