Australia, NZ dollars on defensive as lockdowns spread

SYDNEY: The Australian and New Zealand dollars were under pressure on Wednesday as the spread of the highly infectious Delta variant of COVID-19 challenged confidence in economic recoveries both at home and globally.

The Aussie lay at $0.7519, having fallen 0.7% overnight to erase four days of gains. The failure at resistance around $0.7616 and the retreat under the 200-day moving average at $0.7564, risks a test of the June trough of $0.7478.

The kiwi faded to $0.6995, after also losing 0.7% to as low as $0.6980. That took it well away from last week's rally top at $0.7095 and puts the focus back on the June low of $0.6923.

The Aussie also fell sharply on the yen and euro, as widening coronavirus lockdowns in Australia threatened the country's rapid recovery from last year's recession.

Around half of all Australians are under stay-at-home orders, with Sydney locked down until July 9. New Zealand has also closed its travel bubble with much of Australia, in a harsh blow to its tourist sector.

"Lockdowns have a very large and immediate negative impact on spending and that means less GDP," said Gareth Aird, head of Australian economics at CBA.

However, he emphasised that incomes were still supported by government payments and less spending translated into more savings, which would be spent once the lockdowns were over.

"A partial drawdown of savings will be a tailwind on household consumption in 2022," he added. "If the lockdowns end as scheduled then the damage on the macro economy will be minimal and the economic outlook will remain strong."

The sudden return of wide scale lockdowns could make the Reserve Bank of Australia (RBA) more cautious on the outlook when it holds its July policy meeting next week.

Analysts have assumed the bank will not extend its three-year yield target to late-2024, but will announce another round of bond-buying for when the current A$100 billion programme ends in September.

There is also uncertainty on whether the RBA will stick to its stance that rates are unlikely to rise until 2024, with some expecting it to acknowledge a move could come earlier.

Markets are pricing in a hike for late-2022 or early-2023, though an extended national lockdown could push that out.

The doubt helped pull 10-year bond yields down to 1.50% , from 1.56% at the end of last week, narrowing the spread over Treasuries to just 2 basis points.