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Australian dollar drops to 10+ year lows as RBA announces quantitative easing

Posted: 16 March 2020 1:49 pm
News

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AUD may be on the cusp of a new historic low as the Reserve Bank lays out its plans.

The Australian dollar has tumbled over 6% against the US dollar in the last week, chalking up its worst position in over a decade.

It's now sitting perilously close to its 2009 lows of 0.6007.

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AUDUSD chart by TradingView

The plunge comes alongside Australia's coronavirus stock market slide.

Could it breach those lows? There are reasons to expect further drops as well as reasons for a turnaround.

Reasons for further drops

Today (16 March) the Reserve Bank of Australia (RBA) announced that it would start quantitative easing. Often colloquially simplified to "printing money", quantitative easing understandably leaves markets wary of inflation.

"Cheap money" in the form of lower interest rates can also put a damper on investments in AUD holdings from overseas investors because lower cash rates mean less interest earned.

The RBA said it would "announce further policy measures to support the Australian economy" this Thursday, so further rate cuts may still be on the table.

The US dollar has also been traditionally characterised as a safe haven in times of trouble, and much of the Australian dollar's decline could simply be attributed to the strength of the US dollar at the moment.

Cheap currencies theoretically self-correct, in part by boosting exports. This in turn helps drive direct demand for a country's currency and builds local industries, building more confidence in a country's currency.

However, it may not play out that way when the whole world is entering a simultaneous recession, with manufacturing slowdowns everywhere.

Reasons for a rebound

Stimulus packages, quantitative easing and interest rate cuts are also happening in the United States and beyond, and these factors are by no means limited to Australia.

Flight from the Australian dollar could just be a cursory response, which could reverse as quickly as it began.

If faith in the greenback starts waning, the Australian dollar and other currencies could start looking more desirable.

There are a lot of variables and unknowns, and time will tell how markets perceive the changing coronavirus and currency landscape, and what it means for international money transfers and forex traders.


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