Motley Fool Australia

Why China’s new COVID outbreak is seeing the Aussie dollar fall… and what this means for ASX shares

ASX shares and ETF representing by paper boat made from one hundred dollar note floating on sea containing covid bugs
Image source: Getty Images

The COVID-19 pandemic first struck in Wuhan, China, sending the city of 11 million people, the wider Hubei region and much of the nation into strict lockdown.

The extreme mitigation measures China immediately took placed the nation in the enviable position as one of the few to have contained the deadly virus.

But with today’s reports of renewed outbreaks, China again faces the prospects of an unchecked coronavirus spreading amongst its massive population.

What did China report?

China has reported 181 new cases of COVID-19 in its northwest Xinjiang region. Of those, 161 are people who do not display any symptoms of the disease. The government reported 20 new confirmed cases of people showing symptoms, as Chinese policy doesn’t count those with asymptomatic infections as confirmed cases.

Massive testing of some 4.8 million people is under way following what are the first new local infections since 14 October.

Why did the Aussie dollar slip on the news and what to expect from ASX shares?

The relative strength of the Australian dollar is based on more factors than we can list in this article.

But one prime driver that’s been keeping the Aussie at a relatively strong level is the high price or iron ore, Australia’s number one export earner. China, Australia’s number one purchaser of iron ore, uses it to make steel to fuel its massive infrastructure and building projects.

China’s voracious appetite for iron ore has been a key driver in keeping the price of the metal far higher than most analysts had forecast, currently at US$121 per tonne.

If the coronavirus manages to get ahead of Chinese authorities, it could see much of the Middle Kingdom’s factories shuttered again. If that happens it could quickly see the price of iron ore, and the Australian dollar, fall hard.

Remember, iron ore was trading for $81 per tonne in February. Not long after the Aussie dollar was trading for as little as 52 US cents in mid-March.

On today’s news the Australian dollar slid 0.3% to 71.18 US cents.

Meanwhile, the S&P/ASX 200 Index (ASX: XJO) looks to have reacted negatively to the news as well. The ASX 200 was down 0.3% around midday but has since rallied slightly.

Iron ore giant BHP Group Ltd‘s (ASX: BHP) share price is down 0.6% in that same time.

Where to invest $1,000 right now

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.

*Returns as of June 30th

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

Related Articles…