Lombard: Zero COVID crashing Australian dollar

TS Lombard with the note:

Delta won’t derail this recovery. We stand by the view we put forth last month that investor concern about the surge of the Delta variant in southern US states was overdone. But this view was conditioned b your understanding that there would not be another round of lockdowns–either centrally-imposed by governments or bottom-up by individuals becoming more cautious–in the major economic centres. Cases are rising in these centres (California, Texas and New York) but the key element of the view is that activity will continue: as Chart 1 shows, there is currently no sign of activity being hit as a result of the rise in cases in these three states, unlike in Dec-20.

But this is certainly not the case elsewhere in the world and the travails of Australians, with Sydneysiders entering their 8th week of a one-week lockdown, and now New Zealanders, with the entire nation entering a one-week lockdown after the initial discovery of a single Covid case in Auckland, show that local economics are still very sensitive to the path of the pandemic.

The policy approach from both Australia and New Zealand is one of Zero Covid: prevention rather than mitigation. In the early days of the pandemic this was a comparative advantage, with economic activity in both countries recovering more rapidly than elsewhere–indeed, last year we highlighted how New Zealand was set to be a winner in the second virus wave. Chart 2 shows that rapid lockdown tightening in response to rapid case count rises was a successful approach. But this was before vaccines were approved for use. Now its policy is turning into a disadvantage.

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About the author

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.