Pound-Australian Dollar Rate Hits Post Referendum High as Virus Fears "Channelled via AUD"

- AUD near bottom of barrel as market vents coronavirus fears.

- GBP strongest performer Vs AUD after BoE holds Bank Rate.

- ING says AUD is "quintiessential proxy" for China sentiment.

- Will suffer from further spread, as economy awaits bill for fires.

- Says RBA could cut cash rate sooner than markets expect.

- Saxo Bank says "remain cautious," as AU receives 9th case.

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The Australian Dollar was scraping the bottom of the barrel Thursday as investors vented their fears about the coronavirus outbreak through the China-linked antipodean currency, which suffered its biggest loss to a Pound that was boosted by January's Bank of England (BoE) interest rate decision. 

Pound Sterling rose 1.29% against the Aussie to a fresh post-referendum high of around 1.9539 as UK bond yields surged after the BoE left Bank Rate unchanged at 0.75% in what was expected to be close-call decision. British yields were rising as their Aussie counterparts plumbed new lows in moves that saw the antipodean underperformed only by the oil-backed Norwegian Krone. 

Above: Pound-to-Australian Dollar rate at 4-hour intervals alongside 2-year GB government bond yield (blue line, left axis). 

Strategists at ING say the Aussie will continue to be used by investors as an outlet for their fears about the coronavirus that's having increasing success in escaping from China, which is now facing at least a sharp first-quarter economic slowdown. Australia itself received its ninth infected person from Wuhan, China on Thursday although the virus is now in 19 countries other than China. 

"Predicting developments as the virus spreads is beyond our expertise, but it is important to note how the AUD is a quintessential proxy currency (more than the NZD) for China-related sentiment, so any rise in virus-related fears are likely to be channelled via AUD weakness in the G10 space. The bushfire situation is also curbing AUD upside as there is still a high degree of uncertainty about how long the environmental emergency will last and what the economic consequences will be," Francesco Pesole, a strategist at ING. 

Above: AUD/USD rate at 4-hour intervals alongside 2-year AU government bond yield (blue line, left axis). 

Coronavirus has now infected more people than the 'SARS' strain of it did in 2002-2003, which hampered global growth at a time when China was a much lesser component of the global economy. And since that time, Chinese demand for Australia's raw materials has made developments in the world's second largest economy an increasingly important influence on the Aussie currency.

Chinese cities are turning to ghost towns as the public isolate themselves to avoid infection. That explains in large part why a government economist said on Wednesday that GDP growth could fall below 5% this quarter, from 6% previously - a slowdown that'd likely be felt far beyond China's borders. This is after coronavirus spread to all 31 provinces.

Above: Pound-to-Australian Dollar rate at daily intervals alongside 2-year GB government bond yield (blue line, left axis). 

"The renewal of coronavirus fears looks more intense here and showing signs of washing over global markets rather than staying limited to Asia and commodities...We urge traders to remain cautious," says John Hardy, chief FX strategist at Saxo Bank. "AUDUSD is nearing its cycle low close around 0.6700 as Australia faces severe fallout risks from weakened Chinese demand over the coronavirus situation. Somehow, the market is pricing extremely low risks of a rate cut at next Tuesday’s RBA meeting."

China's National Health Commission (NHC) said Thursday that as of 24:00 on 29 January it was aware of 7,711 confirmed cases of the super-pneumonia-like disease, up from 5,974 the previous day and up from 291 on January 21. Severe cases were at 1,370, the number of suspected cases was at 12,167 and the number of individuals "undergoing medical observation" had risen to 81,947. That's according to Yandex translations of NHC statements.

Above: AUD/USD rate at daily intervals alongside 2-year AU government bond yield (blue line, left axis). 

Contagion fears and the economic disruption they could bring are tipped to continue pressuring the Aussie, which risks heavier losses if investors come to see the outbreak as something that's likely to bring forward Reserve Bank of Australia (RBA) rate cuts. Pricing in the overnight-index-swap market implied a 0.70% cash rate for February 04 on Thursday and a 0.59% cash rate for April 07, which means the Aussie unprepared for interest rate cuts any time soon.

"The Australian dollar has recently erased all year-end gains (which were partly linked to a globally weaker US dollar), as market sentiment deteriorated and the rate outlook remained unattractive," Pesole says. "We highlight the risk of the RBA cutting earlier than market expectations, which represents one of the key downside factors for the AUD in the short term. In particular – even though we see a second cut as unlikely – markets may price in more easing after the cut unless the central bank clearly states the one-and-out nature of their move."