(06 February 2020)DAILY MARKET BRIEF 2:AUD sees near-term weakness

With the coronavirus outbreak in China ongoing, highly cyclical currencies with strong ties to Chinese growth have been hit hard. And this is the case for the Australian dollar.

The AUDUSD fell by around 3% earlier this week. While UBS CIO Global Wealth Management anticipates a rebound in China's industrial activity and trade (delayed a quarter to 2Q), the impact of the virus will be felt on Australia's economy through commodities, tourism, education, etc.

CIO has therefore lowered its end-2Q AUDUSD forecast to 0.69, from 0.71.

"The situation remains fluid, and the development of the virus is hard to project. Hence, forecasts as to the coronavirus' economic toll are far from final," CIO analysts Wayne Gordon and Thomas Flury said in their latest note.

However, they keep the 2H20 AUDUSD forecast unchanged at 0.73.

At its recent meeting, the Reserve Bank of Australia (RBA) was not that dovish, characterizing the coronavirus and bush fire risks as temporary.

The central bank also pointed out that previous policy adjustments are doing their job by assisting household balance sheet adjustment and supporting asset prices, and should therefore lead to increased consumer spending and a recovery in housing construction.

While CIO believes the RBA will cut interest rates by 25bps at least once this year, it also believes the rates markets have priced this in already.

"Recent comments from the federal government have reinforced our view on additional fiscal spending in the May Budget; for example, bringing forward scheduled personal tax cuts," the analysts noted.

For investors, CIO maintains its view that any AUDUSD setbacks below 0.68 should be used to add outright long positions.

By UBS