Rollercoaster Q1 Ends on an Off Note as Chinese COVID Woes Push a Risk-Off Mindset

As March drew to a close- along with the first financial quarter of 2022- the AUD seemed unstoppable. After hovering tantalizingly close to a six-month high in the last few days of the month, hopes of breaking 0.755 were high.

Sadly, the month and quarter ended on a somewhat muted note as the Australian Dollar dropped back below 0.750, opening April at 74.92 US cents. Although it marks a significant improvement from the closing figures of the final quarter of 2021, it does leave investors in the FOREX market feeling uneasy as we move into Q2.

Why the last-minute dip? Well, there are several factors at play. Just as the last month has been driven by extenuating circumstances, so is the shifting tide now. Here is a look at what changes drove the AUD back down and how the outlook appears for the next quarter of Australian finance.

COVID Lockdowns in China

Feelings of Groundhog Day continue as parts of China return to states of lockdown, and COVID restrictions hinder businesses across the country. Because of a zero-tolerance policy for the virus, strict regulations surrounding work, contact, and isolation are holding back the largest economy in the world.

Underperforming Chinese markets affect most of the world, but Australia and its currency feel it heavier than others. The close ties between the economies through exports and trade mean the success of one ties closely to the other. Australia can expect negative outcomes across the water for as long as almost one-third of China’s GDP is impacted by restrictions,

The overall feeling across Chinese markets was a strong risk-off mindset. As always, this means international investors err on the cautious side and move away from bolder moves. As a commodity-based currency, the AUD is on the list of things to be avoided in moments such as this.

Move to Safe Haven Investments 

Investors switched to safe-haven currencies following the latest updates out of China. The US Dollar always does well whenever a risk-off tone takes over the FOREX market. Because of this, the AUD struggled to maintain its high flying run of the past week.

Although US oil prices plummeted after an announcement that 180 million barrels would be released to combat increasing supply issues in the country, the dollar value held strong- closing out Q1 in good fashion.

A Late Fade for ASX

Australian mining giant, ASX, faded going into the final days of March, putting an end to a streak of wins and climbing gains. Despite the notable success of the month, the titan could not hold out to the final close following the US’s decision to release oil. The drop in the AUD owes a lot to this last-minute movement.

The Outlook for Q2

The outlook for the second quarter of the Australian financial year is uncertain. With so many elements at play, it remains to be seen for the AUD can perform. If China holds to its COVID-zero policy, then there could be trouble ahead for both economies.

Additionally, the release of US oil is sure to ripple through commodity prices in Australia- one of the main currency drivers. Falls in mining stocks is a worry for investors- and something they must keep a close eye on going forward.

Lastly, inflation is forecast for June. What decisions are made here will shape the end of Q2 and ultimately the rest of the year.

Final Thoughts

Despite its modest end, March 2022 was a month for the history books in the Australian FOREX market. After opening in the mid-0.72s, it climbed and fell again before rising all the way to 0.754- just 0.001 short of a six-month high.

The opening months of this year have been far from plain sailing, with a global pandemic, war in Eastern Europe, and excruciating oil prices all throwing their hats into the ring. All in all, Q1 for Australian FOREX was bumpy but ultimately successful- especially when compared to the final quarter of the previous year.

Q2 could prove to be testing, with much relying on commodity prices and the success of the Chinese economy. Let us hope that the latest outbreak is short-lived and risk-on can be back in fashion sooner- rather than later.