Australian Dollar: Lockdowns Make Positive Labour Data Look Obsolete

- Victoria goes into lockdown
- Sydney lockdown extended two weeks
- No growth likely in Q3 says Julius Baer
- Strong labour market data now redundant

Australian Dollar and new lockdowns

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The Australian Dollar is being tipped to struggle by strategists in the wake of news that the state of Victoria will join Sydney in lockdown.

The lockdowns have lead economists to issue warnings of an economic slowdown in the country, with one saying the entire GDP growth for the third quarter would be wiped out as a result.

This will in turn have implications for Reserve Bank of Australia (RBA) policy and the outlook for the Australian Dollar.

"The recent outbreak of the Delta variant has exposed the weakness of its 'Covid-zero' strategy without a comprehensive vaccine roll-out plan. Australia’s strategy of rigorous contact tracing and border lockdown is neither stamping out Covid-19 infections nor helping them in the economic recovery," says Magdalene Teo, a Fixed Income Research analyst at Julius Baer.

The Australian Dollar was lower against the U.S. Dollar Thursday despite the release of some solid employment data for June, although developments concerning Covid-19 mean that data is now almost redundant.

Australian Dollar exchange rates July 15

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The country's most populous city Sydney saw its lockdown extended for a further two weeks on Wednesday.

It was meanwhile announced Thursday that the state of Victoria will be locked down from 11:59pm tonight until 11:59pm next Tuesday after two more local Covid-19 cases were recorded in the state.

It brings the state's outbreak to 18.

"AUD struggled to take too much notice of another round of solid local employment data overnight as the story of lockdowns in Australia continues to worsen," says a note from the foreign exchange trading desk at JP Morgan in London.

Australia reported 29.1K jobs were created in June, a touch shy of the 30K the market was expecting and lower than the 115.2K created in May.

The unemployment rate meanwhile unexpectedly fell from 5.1% in May to 4.9% in June.

Following the data the Pound-to-Australian Dollar exchange rate was quoted at 1.8508 and the Australian-to-U.S. Dollar rate at 0.7472.

Australian employment situation

Economists at Julius Baer - the Swiss private bank - say they now expect lockdowns to wipe out economic growth in Australia in the third quarter.

"Lockdowns and the accompanying slowdown in economic expansions are hindrances to the Reserve Bank of Australia’s normalisation plans," says Teo.

Central bank policy is a key driver of foreign exchange rates at a time when the world economy continues to recover from the Covid-19 crisis, aided by the rollout of vaccines.

Those central banks that are able to end quantitative easing and raise rates ahead of their peers are likely to see their currencies appreciate.

Should the Australian economy slow over coming weeks and months owing to Covid-19 restrictions then the RBA risks being left behind by other central banks.

For the Australian Dollar, this could mean downside is likely, particularly if the recent slowdown in the Chinese economy continues.

The RBA announced at its July meeting it would continue its bond purchases but at a reduced rate from September to November 2021, and will review the pace in November.

"Fatigue from closed borders and repeated regional lockdowns is setting in while unemployment in affected areas is rising. The Prime Minister is under pressure to increase the country’s low vaccination rates," says Teo.

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She adds that the restrictions could wipe out gross domestic product (GDP) growth in the third quarter of this year.

Some economists estimate that Sydney’s lockdown alone could cost the economy A$1BN a week while the New South Wales Treasury estimates that each week of lockdown wipes A$850m from the economic growth.

Key to how the Australian Dollar performs over the remainder of the year will ultimately rest with whether the negative news regarding lockdowns impacts the RBA's bond purchase programme.

The RBA have this month adopted a more flexible approach to quantitative easing that allows them to review whether the current stance is appropriate in November.

However ahead of the November review there is a risk that RBA policy makers signal their concern about the evolving domestic situation, which could inject some idiosyncratic volatility into Australian Dollar exchange rates.

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