The Australian dollar nor the S&P/ASX 200 Index (Index:^AXJO) (ASX:XJO) got much reprieve from the US Federal Reserve's sudden emergency cut to interest rates and a US700 million bond buying spree.
The local dollar is fetching US61.7 cents in morning trade after bouncing to just above US62 cents in the wake of Fed's announcement.
Some experts believe that the Aussie battler is going to tumble to US58 cents in the coming weeks even though the Fed lowered key interest rates to near zero and embarked on quantitative easing (QE).
Both moves tend to depress the US dollar but not in this climate. It's Ground Hog Day for the GFC!
Aussie battler a casualty of the virus war
The Fed's move smells of panic and that's sinking the S&P/ASX 200 Index (Index:^AXJO) (ASX:XJO) this morning. The index tumbled over 3% at the open even though the US market bounced 10% on Friday night. But that's before the Fed's announcement.
The development will put pressure on the Reserve Bank of Australia (RBA) to do more as the COVID-19 fallout intensifies.
More countries are turning to drastic measures to control the spread of the pandemic. Quarantine measures will impact on consumption and global trade.
In the climate of fear, safe haven assets like the US dollar and gold will be highly sort after while risk assets will be dumped. The Australian dollar is clearly in the latter camp given our reliance on China.
Phase two of the pandemic pain
For that reason, it's seen as a barometer of the Chinese economy. The irony is that China is making a tentative recovery as the epicentre of the pandemic moves from the Asian giant to Europe and the US.
Factories in China are reopening and people are trickling back on to the streets. But China is a large exporter of goods and their biggest customers are now going into a lock-down. The nature of the global recession (which we are probably already in) is changing right before our very eyes.
But this is exactly why we want to see a weak Australian dollar. It technically can help our economy as the next phase of the crisis unfolds.
Foolish takeaway
As China gets back on its feet and finds that no one wants to buy its goods, expectations are that the government will have to unleash a massive stimulus program that includes infrastructure construction to absorb the unemployed.
This construction program will require iron ore, and Australia has a lot of it. This puts our miners like Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) in a sweet spot.
They sell their ore in US dollars and pay a bulk of their expenses in the weakening Australian dollar. This thematic also helps the Australian federal and state budgets.
The weakening Australian dollar won't insulate us from the pain but it will at least help to soften the blow.
