The AUD/JPY is recovering in Asia on hopes the U.S. Senate will pass a large coronavirus aid package nL1N2B955B. S&P futures soared nearly 4.0% on the report, but have since lost some steam.
The coronavirus pandemic has quickly become a global economic crisis and worse yet, a credit market crisis is looming. The virus will run its course and the global economy will then recover, but if there is a full-blown credit crunch, the damage might be long-lasting and, in some cases, permanent.
Credit markets are starting to show signs of stress with the biggest concern in the commercial paper market, which has virtually frozen.
The moves by the Fed and other central banks Sunday/Monday did nothing to calm markets and if anything, triggered fresh shockwaves as faith in the 'Fed put' was laid to rest nL1N2B90GF. The Fed will likely need to directly start buying commercial paper to unclog the credit pipelines next, and there is talk they could announce such a plan by the end of this week.
Markets will react much better to a combination of Fed intervention in credit markets and government fiscal spending that targets business sectors being cut off from credit. A failure to act in a coordinated way would result in more waves of risk selling, including of AUD/JPY.
The worst-case scenario is that markets will continue to be extremely volatile and less efficient until the coronavirus runs its course. That would expose AUD/JPY to a test of the 2008 low around 55.00.
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