What does lockdown mean for next weeks RBA meeting

Why is the spread of the Delta Variant causing concern?

While there is insufficient data to determine if the Delta strain is more deadly than earlier strains, the Delta variant is almost twice as likely to cause hospitalization for the infected.

As NSW’s contract tracers are finding, the Delta variant spreads easily and quickly due to mutations that make it better at latching onto cells within bodies.

Prompting further concern, Australia’s vaccine rollout has been very slow compared to other countries. Just 4% of Australians have been fully vaccinated compared to 60% in the UK.

For the 25% of Australians who have received their first vaccine dose, the efficacy rate for Pfizer-BioNTech and AstraZeneca is 30% and 18% respectively. For the 4% of Australians who are fully vaccinated, it rises to 79% for Pfizer and 60% for AstraZeneca.

Impact of lockdowns on the economy and RBA Policy

The outbreak of the Delta variant comes just three months after the end of key financial support programs such as JobKeeper. The state of NSW accounts for around one-third of Australian economic activity and Great Sydney which is at the epicentre of the outbreak, accounts for three-quarters of that.

Supported by evidence from previous short sharp lockdowns that suggests the impact on confidence and activity is relatively short-lived, US investment bank Morgan Stanley estimate the direct economic impact of a two-week lockdown will cost approximately ~A$2bn or 0.1% of annual GDP.

However, if the Greater Sydney lockdown appears set to be extended and other States also go into lockdown, the outbreak has the potential to play a part in the Board's thinking at next week’s live RBA meeting.

What does it mean for the ASX200?

Learn more about trading indices

Apart from the outbreak, traders also have end-of-financial-year flows to contend with that often brings with it volatility as fund managers rebalance portfolios.

In light of all of this, the ASX200 has been strangely subdued today currently trading flat on the day at 7306.4, seemingly unsure which way to turn. Technically, the preference is to buy weakness caused by uncertainty towards uptrend support coming in 7100/7000 area.

Following the release of jobs data for May in mid-June, which saw the unemployment rate fall to pre-pandemic levels at 5.1%, a third local bank brought forward its RBA lift-off expectations date to November 2022.

Today after a fourth Australian capital city Brisbane joined three others in lockdown to thwart the spread of the Delta variant, there are now over 12 million Australians locked down unable to leave their homes, except for essential reasons including shopping and exercise.

The result of the outbreak has been a dramatic loss of reputation for the Australian Federal government following its tardy vaccine rollout and also for the NSW government given its delayed decision to lockdown the suburbs at the center of the Sydney outbreak.

The risks of wider and extended lockdowns are likely to warrant consideration at next Tuesday's RBA meeting. More so given the July meeting has been set up as a key one for a decision on the future direction of monetary policy.

As such, the RBA is likely to emphasise that considerable uncertainty remains and that substantial support is still required, mindful that important financial support programs such as Jobkeeper expired in late March.

It may also take the opportunity to push back against the more aggressive pricing of interest rate hikes that have followed the big bank's calls. As of yesterday, the OIS curve had 38bp of hikes priced for year-end 2022 and 71bp for year-end 2023.

While this would be a welcome development for the local equity market, it would be an unwelcome turn of events for the AUDUSD, which remains out of favour following the more hawkish FOMC meeting.

Technically the AUDUSD remains at risk of a deeper decline and to negate downside risks it needs to see a sustained recovery back above the 200-day ma at .7660 followed by a break and daily close above last week’s .7616 high. Aware that until this occurs, allow for a decline towards .7200c.