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Tumbling oil prices prompt broader risk off mood forcing AUD back below 0.63 US cents

AUD - Australian Dollar

The Australian Dollar trended lower through trade on Tuesday as a broader risk off mood permeated markets and investors attentions turned to the realities of the economic hardships that lie ahead. Oil prices continued their downward spiral as losses across WTI futures for May began spilling into longer dated contracts. Yesterday we saw near term West Texas Futures shift into negative territory for the first time, a move that has forced investors to take a closer look at the realities of the current environment, with near term concerns unlikely to be alleviated any time soon. Demand has slumped by as much as 30million barrels a day since the coronavirus lockdown shuttered the global economy, with little change to production levels to date. OPEC nations have agreed to reduce production by 10million barrels a day from May 1 but with little signs non-OPEC oil producers will follow suit there is still a considerable gap between supply and demand and increasing pressure on storage capacities. June WTI Futures fell 50% Tuesday, dipping under $10 a barrel, spilling over into Brent Crude value and other financial instruments. The risk off mood forced the AUD below 0.6350 and 0.63 to touch 0.6253 before creeping marginally higher into this morning’s open.

Having failed to extend beyond resistance handles at 0.64 and 0.6450 the AUD is now vulnerable for another bearish correction. Attentions are shifting away from the day-to-day impact of the virus toward the longer-term economic impact and fall out. RBA governor Philip Lowe painted a grave picture, when proffering an update on Economic and Financial Stability. Lowe estimates GDP will fall by 10% through the first half of 2020 while the unemployment rate may jump as high as 10% by June, a forecast compounded by statistics released by the Australian Bureau of Statistics. Payroll data collected between March 4 and April 4 show employment is down by 6% with approximately 4-5% (approx. 800,000) of previously employed persons losing their Job. Lowe’s comments and the dire labour market outlook offer a sobering reminder that we are unlikely to simply roll out of this health crisis when normal activity recovers.

With support at 0.6250 holding for now we expect resistance on moves above .6350 and approaching 0.6390.

Key Movers

The US dollar touched a two-week high on Tuesday, buoyed by a shift in risk sentiment that prompted an uptick in demand for haven assets. The Dollar index jumped through 100 to touch 100.48 before edging lower and settling around 100.20 after oil prices spiralled ever lower and broader macroeconomic indicators offered a sobering reminder of the economic hardships ahead.

The Great British Pound was the days big looser down over 1% and touching intraday lows at 1.2250. Despite the UK’s COVID19 mortality and transmission rates plateauing it remains in the grips of the health crisis with little end to the current lockdown measures in sight. UK businesses are coming under mounting pressure and as chatter again returns to the possibility of a hard Brexit their ability to bounce out of this crisis may be hampered further if the UK leaves the EU without a firm trade deal in place. Reports suggest the UK won’t ask for an extension to the current divorce date and will reject one if offered by the EU; casting an ever greater pall over the future economic outlook.

The Euro found support on Tuesday as Italy agreed to work with other EU members in formatting guidelines for access to new ESM credit lines. Bouncing off 1.0815 the Euro touched intraday highs at 1.0880 while enjoying strong gains against commodity led crosses. AUD/EUR fell below 0.58 while NZD/EUR broke 0.55 to touch 0.5476.

Expected Ranges

AUD/USD: 0.6130 - 0.6390 ▼

AUD/EUR: 0.5690 - .5850 ▼

GBP/AUD: 1.9180 1.9740 ▼

AUD/NZD: 1.0480 - 1.0630 ▲

AUD/CAD: 0.8880 - 0.9020 ▼