On Tuesday (21 / April), the Australian Central Bank released minutes of its April monetary policy meeting which still highlighted the continued impact of the Coronavirus spread. Specifically, the report discusses the problem of suspension and cancellation of business investment plans, as well as household consumption which is expected to continue to shrink over the next few months.

RBA councilors see the possibility of a fall in exports and various other economic sectors if the COVID-19 pandemic persists for a longer time. This is reasonable, considering that the pandemic has forced many countries including Australia to make efforts such as a lockdown.

Furthermore, minutes for a meeting held on 7 April revealed that the RBA policy-making board predicted the Australian economy would shrink drastically in the second quarter of this year, and likely to continue into the next third quarter.

In the Monetary Policy Considerations section, policymakers note that coordinated monetary and fiscal approaches will reduce the potential for a collapse of the Australian economy. The policy is also believed to help support economic recovery after the COVID-19 pandemic has passed and the lockdown has been removed.

Despite the gloomy outlook and confidence in the authorities' steps to counter Corona's impact, RBA policymakers recognize that the Australian financial system, in general, remains resilient. The liquidity position is stable and is supported by a monetary buffer system that is available today, so it is believed to be able to support the economy.

Dim Dimension of Market Risk Interests Causing US Dollar Strengthens in General

In general, the US Dollar is currently strengthening quite significantly against various commodity currencies such as AUD, NZD, CAD, and currencies of developing countries. This was triggered by the dimming of the risk appetite of market participants following the fall in crude oil prices.

The decision of the Australian central bank (RBA) not to change its interest rates has supported the strengthening of the Aussie yesterday. However, the movement tends to consolidate in trading today (8 / April), following a downgrade of local government bond ratings by the leading debt rating agency S&P. At the time the news was written, AUD / USD was trading in a narrow range around the 0.6166 level.

On Tuesday, the RBA decided to keep interest rates steady at the level of 0.25 percent, in line with market expectations. They also did not convey other monetary policy changes, while reporting that recent market operations had succeeded in suppressing bond yields according to the central bank's target.

On the same occasion, the RBA warned of the magnitude of the threat of the economic crisis looming over the land of the Kangaroo. RBA Governor Philip Lowe explicitly stated that the unemployment rate might skyrocket to a multi-year record high. However, the policy expectations went smoothly, also sustaining market optimism for a while.

Downgrade Australian Bonds Drop Australia

This optimism wavered after Standard & Poors announced a downgrade of the outlook for Australian government bonds. The AAA rating debt was downgraded from "stable" to "negative" on account of the swelling government budget deficit.

On 30 March, the Australian government launched a JobKeeper Payment package worth AUD130 Billion with the target of helping companies affected by the COVID-19 pandemic to continue retaining their employees. 

This additional support accelerates the estimated total stimulus budget to AUD320 Billion, or equivalent to around 16.4 percent of total annual GDP. "In the Asian session the AUD / USD weakened towards 0.6130 after the credit rating agency, Standart & Poors (S&P) which caused a decline in the Australian government's credit outlook.” 

“Which was previously rated AAA from 'stable' to 'negative'. AUD / USD remains heavy in the long run short because of changes in the direction of the S & P and the strengthening of the USD,” said Kim Mundy, a forex strategist from CBA.

But Mundy added that debt ratings are not the main driver of currency exchange rates. In the current situation, he thinks commodity prices and the direction of the USD are the main short-term drivers of the AUD.