The Australian dollar remains well supported in today’s trading session, shrugging off the latest decision by ratings agency S&P to downgrade Australia's AAA rating from stable to negative on the basis of the condition of the local economy which has been drastically hit by the effects of the coronavirus.
With unemployment surging, commodity prices dropping and businesses closing the Australian economy is facing difficult times hence the decision by the ratings agency for the latest move.
"We have revised our outlook on Australia to negative from stable to reflect a substantial deterioration of its fiscal headroom at the 'AAA' rating level. At the same time, we are affirming our 'AAA/A-1+' long- and short-term local and foreign currency ratings," said S&P in a note.
Although the Australian dollar held up relatively well in light of the news, the threat of a further downgrade remains on the horizon and if this gathers momentum the Aussie currency may not be able to shrug off a second downgrade.
"We could lower our rating(Againa within the next two years if the COVID-19 outbreak causes economic damage that is more severe or prolonged than what we currently expect. With household indebtedness at elevated levels, this could delay the process of repairing the government balance sheet beyond what we expect currently. Government indebtedness and interest costs will remain at elevated levels," said S&P.
Kim Mundy, an FX Strategist at Commonwealth Bank of Australia agrees that the Australian dollar may feel the pressure on the back of another possible downgrade and it is also at the whim of US dollar strength.
"AUD/USD declined after credit rating agency, Standard & Poors downgraded the ‘outlook’ on Australia's AAA sovereign credit rating from ‘stable’ to ‘negative. A negative rating means there is a one in three chance of a rating downgrade in the next two years. AUD/USD may remain heavy in the near term because of S&P’s changed guidance and a strengthening in USD." She said
