How Hard Could Australia’s Lockdown Hit AUD?

The US 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 NY 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. Senate leader McConnell confirmed that another stimulus package is in the works with President Trump pushing for a second stimulus check.

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 6 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 as $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 20th and June 16th, there was only 1 day with more than 20 cases but by July 3rd, 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.

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