The Australian dollar was struggling to maintain even a modest weekly rally on Friday following five straight weeks of losses as worries over the spread of the coronavirus in China overshadowed the fading risk of rate cuts at home.
With no end to the outbreak in sight, analysts fear the impact on the Australian economy will be greater than first thought with some even predicting a contraction in gross domestic product for this quarter. "We have revised our preliminary estimate of the impact of the coronavirus and now expect it to take around 0.5 ppt off Australia's GDP in Q1," said ANZ economist Felicity Emmett.
"Along with a small hit from the bushfire impact, we estimate that GDP will now fall 0.1% in Q1." Investors are also still using the Aussie as a liquid proxy for China risk in general and selling into any bounce.
As a result the currency was down 0.2% on Friday at $0.6716 having topped out at $0.6775 on Wednesday. That left it up almost 0.5% for the week so far, but still down 4.3% since the turn of the year. The New Zealand dollar could not even manage that, being down 0.1% for the week at $0.6455 having touched its lowest since early December.
The Aussie's only support came from another round of comments from the Reserve Bank of Australia (RBA) that underlined its reluctance to cut interest rates again. Yields on three-year government paper have shot back to 0.725%, after hitting an all-time trough of 0.553% early in the week.
The 10-year bond future did manage to bounce 5 ticks on Friday, but was still off almost 10 ticks for the week. Appearing before parliament, RBA Governor Philip Lowe made it clear the risks of taking rates even lower outweighed the benefits of easing, saying it would take a material rise in unemployment to change the balance.
The comments came as the central bank slashed forecasts for economic growth in the near term to reflect the drag from bushfires and drought at home and the coronavirus in China, but expects a rapid recovery later in the year.
Investors have reacted by sharply scaling back wagers for more cuts with the probability of a quarter-point move by April down to 22% from 80% at the start of the week. An easing to 0.5% is still priced in but not until October, compared to June just a week ago.