How Hard Could Australia’s Lockdown Hit AUD?

The U.S. dollar traded higher against most of the major currencies on Tuesday, but a large part of its gains were incurred during the Asian and early European trading sessions. In the New York hours, the greenback consolidated with very little direction. Stocks fell hard after yesterday’s rally, while Treasury yields inched lower. New coronavirus cases in the sunbelt remain elevated, with Texas reporting a new record high. The lack of reaction in FX is a sign that summer doldrums are here, and with a completely barren economic calendar on Wednesday, further consolidation in currencies is likely. U.S. Senate leader Mitch McConnell confirmed that another stimulus package is in the works with President Donald Trump pushing for a second stimulus cheque. 

 

The fresh lockdowns in Australia is the biggest story in the forex market. It started with shutdowns in Melbourne suburbs but now the entire city and suburbs around it have been ordered to “stay at home” for the next six weeks. Victoria is the second largest state in Australia and this lockdown is expected to affect more than 5 million people. According to the treasurer, this lockdown poses a serious risk to the economy’s recovery and could cost the nation a $1 billion a week. So while the Reserve Bank of Australia said the virus’s damage on the economy should be less severe than they feared, the uncertainty drove the Australian dollar and Australian stocks lower. Service activity also contracted at a slightly faster pace in June, which is at odds with the sharp improvement in manufacturing PMI. As the six-week lockdown begins, we expect further weakness in the Australian dollar and general underperformance for AUD. More specifically, these latest lockdown measures could drive AUD/USD back to 66 cents.

 

Our bigger concern is that Australia’s track is a taste of what’s to come for other parts of the world. After experiencing a sharp first wave in March, they flattened the curve quickly with heavy restrictions. Between April 20 and June 16, there was only one day with more than 20 cases, but by July 3, there were more than 250 cases, prompting the government to respond with these latest measures. Other countries could follow the same course if a second wave emerges. 

 

In contrast, Germany, the Eurozone’s biggest economy, continues to ease lockdown restrictions making the euro more attractive in comparison. The German state of Saxony will now allow fairs starting July 18 and gatherings of more than 1,000 people from Sept 1. Improvements such as these allowed investors to shrug off softer industrial production numbers. German IP rebounded in May but less than expected. Still, the euro should outperform aussie and other major currencies as the recovery gained momentum in June.

 

Yet sterling was the best performer. No major UK economic reports were released today, but investors are driving the currency higher on the prospect of new fiscal stimulus measures. Chancellor Sunak is scheduled to provide an economic update and present these measures tomorrow. The New Zealand dollar held onto its gains, while the Canadian dollar traded lower despite a very strong increase in IVEY PMI.  

 

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