Australian Dollar Softer, Virgin Australia News Shakes Domestic Confidence

- Virgin Australia in administration
- AUD softer across the board
- Global dynamics unsupportive on the day
- GBP/AUD carving out a new support level

Above image copyright Pound Sterling Live, screengrab courtesy of Virgin Australia

- GBP/AUD market rate: 1.9650
- Bank transfer rates (indicative): 1.8944-1.9080
- FX specialist transfer rates (indicative): 1.9165-1.9450 >> more information

The Australian Dollar traded broadly lower on Tuesday, April 21 amidst softer global market conditions and unsupportive domestic developments that include news that Virgin Australia has entered administration.

The Pound-to-Australian Dollar exchange rate is up to 1.9651 at the time of writing as a result, confirming its two-week run of declines have stalled and we are now considering if the pair in the process of building a more solid technical support level from where it can rebound.

A look at the charts shows support building at around 1.9590-1.96, the exchange rate has failed to close below here for 8 consecutive days now and this gives Sterling the opportunity to build a platform from where it can rebound:

The inability of GBP/AUD to go lower corresponds with a broader pausing of foreign exchange trends across the market; we are seeing a whole host of exchange rate pairings start to move sideways as the next big trigger is awaited.

The Australian Dollar is perhaps one of the most highly sensitive major currencies to shifts in broader investor sentiment, tending to fall when global stock markets are selling off and rise when they are appreciating.

Tuesday sees stock markets trading in the red, amidst ongoing fears that the global economic contraction that is underway has not been fully discounted by stock markets that could be accused of being overly optimistic regarding the economic outlook.

Driving home negative sentiment is the ongoing rout in global oil markets which is the clearest signal that the economic slump is so significant that oil demand has simply dried up. While stock markets can be inflated by global central bank stimulus measures, oil markets will always offer a clear signal as to the state of the world's economy via the demand channel.

"With the pandemic bringing the global economy to a standstill, there is so much unused oil that energy companies have run out of room to store it. Without storage, demand for a near-term crude contract has collapsed. Underscoring just how acute the concern is over the lack of immediate storage space, the price on the futures contract due a month later settled 19.6% lower at US$20.43 per barrel. The gap between the two contracts is by far the biggest ever," says Besa Deda, Chief Economist at St. George Bank in Sydney.

Turning to Australia, news that local carrier Virgin Australia had filed for administration will have sent shockwaves through the local business and financial community, the majority of which it can be argued have never seen a full-blown recession before.

Virgin Australia announced Tuesday it had entered voluntary administration, saying the move is aimed at helping the business recapitalise and help ensure it emerges ia stronger financial position on the other side of the COVID-19 crisis.

The Australian Financial Review had earlier published an article warning of such an outcome after the government had refused to offer it special financial assistance.

Virgin Australia has been acting as the country's de facto second carrier for 20 years, employing more than 10K people and a further 6K indirectly, they operate routes to 41 destinations, including major cities and regional communities.

The move will have knocked confidence in Australian assets and will be a contributor to the Australian Dollar's softer performance on the day.

Aussie Economy to Shrink 10%

The scale of the economic downturn facing Australia was laid bare by Reserve Bank of Australia (RBA) Governor Philip Lowe who spoke in Sydney today and presented the Bank's latest financial forecasts.

The RBA expect a 10% decline in GDP over the March and June quarter, with most of the fall occurring in the June quarter. The unemployment rate is likely to be around 10% by June.

A recovery is expected in the third quarter which should trim the 2020 decline in GDP to 6% according to RBA forecasts. The recovery in 2021 should see 6-7% growth come through.

"The result of both the restrictions and the uncertainty is that over the first half of 2020 we are likely to experience the biggest contraction in national output and income that we have witnessed since the 1930s," said Lowe.

The RBA assumes that the various restrictions implemented to stop the spread of covid-19 begin to be progressively lessened in the approach to the middle of the year, and are mostly removed by late in the year, except perhaps the restrictions on international travel.