AUD/USD is proving resilient despite the collapse in risk assets, as assumed correlations appear to be breaking down.
In previous bouts of high volatility when markets destabilised and investors fled to safe havens, the AUD fell dramaticallyagainst currencies such as the JPY, USD and CHF.
This was mostly due to the unravelling of carry trade strategies involving the 'high-yielding' AUD. The AUD is no longer high yielding, with Australian yields well below those offered by the USD. Hence, leading into the coronavirus crisis, there was no large build-up of long AUD positions tracking the record rise in equities and strong gains in EM assets. In previous market routs, FX investors sold currencies of countries with large current account deficits and bought those with large surpluses, such as the JPY.
Australia is currently running a record current account surplusnL4N28C43U.
These factors have cushioned the AUD in recent days, but the prospect of slowing global growth will limit AUD/USD gains.
Weak Chinese demand for Australian exports will negatively impact the economy and likely force the RBA to lower the cash rate and eventually resort to QE.
The AUD/USD will probably struggle to break above the 21-day MA (0.6670), but bears looking for a sharp fall towards 0.6000 resulting from the coronavirus crisis might be disappointed.
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