Iron ore, corona virus and next economic phase

This is my second blog on iron ore and corona virus series. This is part two of the series which has added next economic phase after this unprecedented global event.

As I stated in my part one blog that economic consequences of corona virus on Australian economy would be be such that one can only imagine.

One can see from RBA quantitative easing (money printing) and all -time low interest rates. Adding further into whole saga was lower AUD which dropped to $0.5508 c against USD on Thursday 19 march 2020.

However, Iron price continued to hold above US$90 that was a relief for AUD otherwise AUD would have reached to a level you and I would have seen before.

With all countries closing doors and shutting themselves down to protect their people from Corona virus it will be obvious to think that iron ore price would eventually drop like oil ( USD 20 as of 21 March 2020) due to lack of demand and due to closing car & truck manufacturing plants and construction activities all over the world.

Think a bit further that high iron ore price is only the instrument at our disposal to protect AUD. If iron ore price drops in the same fashion as oil price did AUD may drop down to an unprecedented level. Back in 2000 AUD was below 50 c or nearly 49 c. Iron ore demand from China increased demand for Australian dollar to a level it reached to $1.10 against USD in 2006. Even after GFC AUD picked up due to continued demand for our iron ore.

Now situation is different altogether. In my view, corona virus changed is forever as manufacturing and supply chains are broken and shattered and it would a long time to get back on track. How much time these supply lines take to restore yet to be seen.

Many countries are thinking to enter into manufacturing rather than depending on China alone. This would have unprecedented affect on Australian economy.

Lower Australian dollar would eventually create inflationary pressures to a level RBA would struggle to grapple with with large and unabated fiscal deficits for unknown period of time.

In brief, currency is one of most important indicator of a country's economic outlook. If AUD drops significantly for one reason or another it may create problems for Australian economy you and I can only imagine!