Daily Commentary BY THE CURVE TEAM –

Virus Second Wave to Hit Home

2nd of November, 2020

A surge in cases and spreading lockdowns across the Northern Hemisphere will be felt in Australia.

As we drift closer to summer and Victoria emerges from their second wave, the Northern Hemisphere is moving towards winter and Covid-19 cases are surging. The UK has just gone into nationwide lockdown, cases are surging across Europe and the US just set another record at almost 100,000 new cases in a day over the weekend.

Being an island nation, and experiencing our first day of no community transmissions nationally for the first time in 4 months, we can avoid the health fallout from what is occurring offshore. However the economic impact will be harder to avoid and the implication will be significant.

Tomorrows RBA meeting is a perfect example. The RBA has already done a significant amount to support Australia’s recovery. This along with the fiscal measures has helped the economy through the crisis. However, as central banks offshore to take more action as their economies come under threat from the latest  Covid-19 wave, the RBA’s hand may be forced to ease further.

The main reason is the currency. If everyone else moves and the RBA doesn’t, all other things equal, it puts upward pressure on the AUD. A higher currency acts to tighten overall monetary policy conditions, something that is not desirable when the economy is trying to recover from a recession.

That is one of the reasons that the market is expecting further action from the RBA tomorrow when they meet to discuss policy. With little room to move the cash rate, another ‘package’ is expected to announced to help ease overall monetary policy conditions.

While it is widely expected, it isn’t a done deal with the RBA still holding some doubt over when the best timing for more action might be to gain the greatest degree of traction.

David Flanagan

Head of Money Markets