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Melbourne, Australia re-enters a six-week lock down

Melbourne, a major city in Victoria, Australia, has forced residents to re enter a six-week lockdown. This is after the major city reported 191 new cases of the novel Coronavirus, with double-digit case growth in the past couple of days.

Melbourne's cases have reached "unacceptable" levels, prompting lockdown

Daniel Andrews, Premier for Victoria, stated that the new restrictions were due to the “unacceptably” high number of cases. Furthermore, he also stated that “it is simply impossible, with case rates at these levels to have enough contract tracing staff to have enough physical resources to suppress and contain the virus without taking significant steps” Furthermore, Chief Health Officer Brett Sutton stated that there was a “unanimous view” on the increase in restrictions in Melbourne. Victoria has also imposed to close off the NSW-Victoria border, with over 1,000 soldiers and police officers making their way to reinforce the border.

It is stated that a partial reason to why there has been a resurgence of cases in the state of Victoria and Melbourne in particular, is due to their opting of contracting security firms to regulate the quarantine. In comparison, this is opposed to enlisting the police force like many states in Australia and countries around the world. There have allegedly been security lapses with security guards sleeping with guests hotel guests who were staying due to a mandatory quarantine after arrival into the country.

Melbourne's second lockdown may be detrimental to Australia's recovery

Melbourne and its second lockdown comes back to bite critics who saw New Zealand’s lockdown overly strict in comparison to Australia, touting that Australia has been achieving similar results with fewer restrictions on their citizens. ACT party leader, David Seymour in April that Australians are being “treated like adults” by their Government and are achieving “better results.” Furthermore, he stated that “Australia appears to have its cake and eating it too, as it achieves better COVID-19 health outcomes than New Zealand with fewer restrictions on economic activity.”

Coronavirus Cases in Australia and New Zealand. Australia in red on the right axis, New Zealand in blue on the left axis.

However, as time has shown, New Zealand’s stricter approach has paid better dividends even with the higher initial economic cost. IBISWorld has stated that “the overall recovery of the Australian economy is expected to be significantly hindered by the second lockdown.” The state of Victoria contributed 24% of Australia’s GDP in 2019. The ASX and AUD are down 0.89% and 0.14% on the lockdown news, respectively.

ASX and AUD down in the past two days

We can see that the Coronavirus continues to grapple the world economically and politically. Brazilian President Jair Bolsonaro saw the Coronavirus as the “little flu” and frowned upon social distancing measures, stating, “we’ll all die one day.” He has now tested positive for the Coronavirus. He would be the second head of Government to test positive for the novel Coronavirus, with Prime Minister Boris Johnson having contracted Coronavirus earlier this year. Furthermore, with no formal Coronavirus plan, President Donald Trump administration grappled with re-opening the US economy amongst an election in September. Jacdina Adern has faced major criticism over lapses in security regarding mandatory quarantine and increases in taxes amongst significant government borrowings.

A vaccine for the Coronavirus would be required to provide stability in the economy, as countries with relatively successful Coronavirus plans are still struggling with the effects and aftermath of the virus.

Upside for the Kiwi dollar ahead?

As New Zealand brings its lockdown to the close, the upside for the Kiwi Dollar against the US Dollar may be on the charts. The Kiwi dollar has been exhibiting significant risk on / risk off characteristics that convey the influence of market sentiment on the pair. This is showed in the chart below with the correlation between the SP500 and NZD/USD pair

NZD/USD pair against the SP500

Quantitative easing pushes the Kiwi dollar lower

The Reserve Bank of New Zealand (RBNZ) kept interest rates unchanged at 0.25%, as analysts predicted. Furthermore, the central bank nearly doubled its Large Scale Asset Purchases Programme (LSAP) to $60 Billion, up from $33 Billion. A textbook example of an increase in money supply, resulting in a depreciation of the currency. And that was what precisely happened on the announcement.

The NZD/USD pair on the RBNZ announcement

RBNZ's Chairman Adrian Orr conveyed a dovish tone in the central bank's forecast for the New Zealand Economy. "The global economic disruption caused by the COVID-19 pandemic is expected to persist and lead to lower economic growth, employment, and inflation both in New Zealand and abroad. Even if New Zealand successfully contains the spread of the disease locally, reduced world activity will mean lower demand for many of New Zealand's exports."

Good fundamentals to push the Kiwi dollar higher

Dubbed the worlds currency, the US dollar has been exhibiting considerable risk-off attributes as is strengthens against many currency pairs. However, with one of the lowest fatality rates in the world for the Coronavirus and a positive consensus with regards to the reopening of the economy, New Zealand has become a breeding ground for optimism.

Equity markets have been conveying this cautious optimism in the markets, as the NZX 50 benchmark climbs 27% from its bottom, securing gains over the past 7 days.

New Zealand opted for an explicit elimination strategy with regards to tackling the Coronavirus, bearing the short-term pain first in hopes of a rapid recovery. This is in contrast to the United States, where movement was restricted, but full lockdown was not fully enforced in all the states. President Donald Trump has since pushed states to ease restrictions fully knowing the risks involved. "Will some people be affected? Yes. Will some people be affected badly? Yes. But we have to get our country opened, and we have to get it open soon," he states. The reopening is against the advice of Dr. Anthony Fauci, the director of the National Institute for Allergy and Infectious Diseases.

We may see a push to the upside for the Kiwi Dollar if the New Zealand recovery improves at a rate much quicker than the United States economy.

Not all good news for the New Zealand Economy

Prime Minister Jacinda Ardern's "Go hard, go early" plan for the reopening of the economy does have its costs. Analysts forecast double-digit unemployment even after the government's $12 Billion wage subsidy. 

With New Zealand keeping their borders shut to all foreign travelers, the tourism industry expects a tough road ahead. With tourism making up around 5.6% of New Zealand's GDP and around 7.5% of the nation's workforce, it is difficult to predict if businesses in the tourism industry survive the coming dry spell. 

Is it time to take a look at the Kiwi Dollar?