The Australian dollar crashed to an eleven-year low as a super-strong US jobs number proved too tempting for currency traders already grappling with fears about the potential damage to the Australian economy from the coronavirus and bushfires.
After sliding as low as US66.62¢ on Friday, a fresh post-global financial crisis low, the Australian dollar recovered to trade at US66.99¢ on Monday.
"The dampening economic impact of bushfires, drought and coronavirus and what that all means for economic activity" are broadly depressing the Australian dollar, said Richard Grace, head of foreign exchange strategy at Commonwealth Bank. "It's clear that the economy in China has slowed and in some areas has ground to a halt," said Mr Grace.
Currency markets have been weighing up those elements for a while and it took a stellar US employment report on Friday to lift the greenback and return the Australian dollar to historic territory.
The US dollar has also attracted buying as coronavirus deaths escalate in China, although the rate of infection is slowing. As traders flock to the perceived safety of the US dollar, they are turning away from riskier currencies, such as the Australian dollar.
The outbreak has focused markets on Australia's close economic ties with China, through the channels of commodity exports, education, and tourism.
Commodity markets have already reacted sharply to demand worries, with oil down 18 per cent at $US50.23 a barrel since the start of January and iron ore futures down 12 per cent at $US80.72 a tonne in Singapore over the same period.
"The Australian dollar has got caught up in downward revisions to global and domestic growth," Mr Grace said.
While the Australian economy has produced some solid pieces of economic data during the last few months, including two back-to-back months of stronger employment data, the bushfires, drought, and the coronavirus are expected to dent March quarter growth.
The Reserve Bank of Australia acknowledged last week that while this is the case in the short-term, it would stick to its trend growth forecasts for 2020 and 2021 as the forthcoming recovery period makes up for a weaker start to activity.
National Australia Bank currency strategist Rodrigo Catril said the most important driver in the short-term for the Australian dollar remains the virus impact in China. The correlation between coronavirus infections and the performance of the Australian dollar is strong, he said.
"If we see factories reopening and travel restrictions lift then the Australian dollar will regain some ground," Mr Catril predicted. "If we see further delays then the Australian dollar will remain under pressure."
The Australian dollar could continue to slide, agreed Mr Grace. But he's doubtful that there will be a big move lower from current levels as Australian exporters are taking advantage of the weakened currency and provide "a lot of valuation support".
He's expecting little change for the Australian dollar, pencilling in US67¢ by the end of June and US68¢ by the end of the year.
This story originally appeared in the Australian Financial Review. Read the original story here.