AUD/USD is extending its downward trend on today morning ahead of the persistent bullish mood around the US dollar, coupled with growing covid concerns in Australia, weighs negatively on Fed’s tight and narrow expectations. As of Tuesday, New South Wales has become new covid epicenter in the country, with about 350 new cases registered. The latest move comes on the heels of an unexpected drop in the Australian NAB business confidence gauge for July, which came in at -8 vs. 15 expected and 11 previous.

The level of Australian business conditions worsened sharply for the second month in July as corona virus lockdowns hit service industries and confidence in general. National Bank of Australia’s NAB.AX cut its trading position index by 14 points to +11 in June, although it is still above the long-term average. The survey’s confidence level dived to 19 points -8 led by the state of New South Wales, where most of Sydney was closed for the entire month.

“The survey shows that the strength of the business sector, which has been seen since the beginning of mid-2021, has faded in the wake of new challenges in the economy but it has not yet worsened to the low level seen at the beginning of 2020. The survey showed a very strong momentum before the recent lockdowns, it is hoped that the economy will recover relatively quickly once restrictions are relaxed.

The Reserve Bank of Australia (RBA) last week argued that the economy could recover quickly once the locks were lifted and forecast strong growth next year. However, such relaxation in Sydney is still a few weeks away as governments struggle to increase vaccine levels. A separate survey of consumers from ANZ, down 3.1% last week, took the index below 100, which is higher than sentiment believers.

Australia’s unravelling “zero Covid” strategy will cost its economy more than £500m (NZ$992 million) every week of lockdown as analysts warn restrictions in some of its most populous states could last until October. Forecasters warned that renewed lockdowns and the glacial pace of its vaccination programme will trigger a sharp drop in GDP in the third quarter as Delta cases threaten to explode. Australia has been held up as a success story during the pandemic, but countries that pursued a “zero Covid” approach are now struggling to contain the fast-spreading Delta variant. An outbreak in China is also threatening its zero tolerance stance as the UK, US and Europe are forced to learn to “live with Covid”.

George Tharenou, a UBS economist, warned the “looming very large economic cost of the lockdown is already evident” in recent retail sales and payrolls data. He estimated that up to A$1.5bn of government support every week will be needed to prop up the economy. Mr Tharenou added: “A third Covid-19 wave in Australia, especially in New South Wales, materially increases uncertainty of the economic outlook, with hard lockdowns by state governments each time cases appear.”

AUD/USD 4 Hour Chart:

Support: 0.7316 (S1), 0.7304 (S2), 0.7279 (S3).

Resistance: 0.7352 (R1), 0.7376 (R2), 0.7388 (R3).

Amidst this above catalysts of Australia economic conditions and strong US dollar pushes the pair into downtrend. We expect a bearish trend for AUD/USD.