The Australian dollar was pinned near three-month lows on Tuesday as markets struggled to assess the potential economic damage that could come from China's coronavirus outbreak.
The Aussie was huddled at $0.6760 <AUD=D3>, having slid almost 1% on Monday when the local market was shut for a holiday. There is some chart support around $0.6755, a trough from last November, and more at $0.6725.
The New Zealand dollar was also down at $0.6547 <NZD=D3> after losing 0.9% on Monday to its lowest since mid-December. Support lies at $0.6523 with resistance around $0.6565.
Both countries have extensive trade ties with China, with tourism and education especially vulnerable to disruption from the virus. Australia welcomes around 1.4 million visitors from China every year, the largest source of tourists.
Adding to the pressure was the risk of weaker Chinese demand for commodities, which had already undermined prices for oil and iron ore.
Investors also use the Aussie as a liquid proxy for the yuan <CNH=> particularly as mainland markets are closed until at least Feb. 2.
"What is bad for the Chinese economy is bad for the Australian economy," said Joseph Capurso, a forex analysts at CBA. "AUD has lost almost 3 U.S. cents so far this month."
"The obvious question is how far can it fall?" he added. "The answer largely depends on the spread of concerns about the virus. The low point in 2019 – $0.6671 – is a good level to watch."
The virus adds another challenge to an economy already singed by massive bushfires and lingering smoke pollution, a headache for the Reserve Bank of Australia (RBA) ahead of its first policy meeting of the year next week.
Markets are leaning against another cut in interest rates after data out last week showed unemployment fell for a second month in December.
Futures imply around a 20% chance of an easing in the 0.75% cash rate on Feb. 4 <0#YIB:>, but that rises to 66% by April.
The odds could change again depending on what inflation figures for the December quarter show on Wednesday.
Median forecasts are for a 0.6% increase in the consumer price index which would take the annual pace to 1.7%, while core inflation is seen rising a muted 0.4% and 1.5%.
A soft outcome could revive the risk of a February easing, while a high number would likely see the market price out almost any chance of a near-term move.
Australian government bond futures benefited from the global shift to safe havens and the three-year bond contract <YTTc1> added 5 ticks to 99.345. The 10-year contract <YTCc1> climbed 7 ticks to 99.0000, implying an yield of 1%.
(Editing by Stephen Coates)
