Coronavirus: The market's wild card, AUD/USD bears lurking

As traders focus on the sentiment surrounding the Federal Reserve, the global pandemic is still at large and is a threat to financial and commodity markets. 

Markets have been pricing in a spectacular recovery with the anticipation of pent-up demand pushing both economic activity and market prices up quickly once the disease and the panic recedes.

However, the resurgence of the virus in the form of the new delta variant has investors back on edge expecting more declines in global economic activity, and probably in markets.

This can be said in particular reference to those nations where vaccination roll outs have not been sufficient to cope with such a contagious variant of the novel coronavirus, such as Australia. 

Epidemiologists say the Delta variant has proven to be the most infectious and transmissible of all the strains so far.

Where there were cracks in Australia's defence system, it succeeded in exploiting them.

'Delta's danger has also shone a light on failures in Australia's vaccine programme. 

Australia was last among OECD countries when it comes to the rollout of vaccines. 

Experts have warned that Delta is likely to have changed Australia's Covid landscape for good.

With mass vaccination unachievable until 2022, and Australians continuing to return home from abroad, Delta's threat will linger, experts say.

Only around 24% of people above 16 years of age are fully vaccinated.

Meanwhile, Australia is battling to get on top of the fast-moving Delta strain that has plunged its two largest cities, Sydney and Melbourne, into hard lockdowns.

New South Wales is one of a number of Australian states struggling to contain the latest outbreak, which has led to lockdowns in some of the country's largest cities.

At least 10 million people across Australia are facing covid restrictions, about 40% of the country's population.

Several regional towns scattered across NSW have also been forced into snap lockdowns after fresh cases, raising fears the virus is spreading out of control.

Despite all that, the Australian dollar remains in a ''wait and see'' range on the charts:

The daily chart's consolidation is owing to the recently surprise hawkishness at the Reserve Bank of Australia vs the market's speculation as to when the Fed will pull the trigger and announce timings of its own tapering of asset purchases. 

The RBA surprisingly maintained its plan to reduce QE next month despite claiming a “flexible approach...reviewed in light of economic conditions and the health situation.”

This set a high bar for the RBA to be swayed from its view that the economy rebounds quickly as soon as lockdowns are lifted.

The RBA appeared to assume that lockdowns are unlikely from Q4 onwards and hence the price action has move into a wait and see range up to this point. 

However, the Aussie bulls could be in for a scare if the delta variant is not contained satisfactorily before the next RBA meeting. 

RBA baseline forecasts still current in lockdowns – MNI

As things stand, with the delta variant spreading and forcing extensions of lockdown, that looks unlikely.

''Policy will respond to this, with more government support likely and the RBA Board likely to consider the question of taper delay at its September meeting,'' analysts at ANZ Bank said.

This could derail the Aussie, especially if there are moves in the greenback to fresh highs depending on an official announcement of tapering timings from the Fed, expected either at the Jackson Hole, 26-28 Aug, or the September Fed meeting. 

As for events before the upcoming labour market data, including ANZ Job Ads for August, will be critical for the RBA’s decision.

Aussie events dates to watch

• RBA minutes (17 Aug): The discussion around the policy response to the recent lockdowns will be of interest. 
• Wage price index, Q2 (18 Aug): Wages growth to rise sharply to 1.9% YoY.
• Employment, Jul (19 Aug): We expect national employment to have plateaued during the initial weeks of the Sydney lockdown.
• RBA Speech, (20 Aug): Chris Kent, Assistant Governor (Financial markets), speaks to the FX Markets 2021 Conference. 

Source: ANZ Bank

Safe haven bid for the US dollar

Meanwhile, it is also worth taking into account the Golden Cross on the DXY index.

 The greenback is the most likely candidate to benefit from risk-off flows away from those nations where the delta variant is keeping their economies in lockdown and currencies weak:

• US dollar teases reversal traders, Golden Cross underpins

As per the analysis above, ''the US dollar is attempting to recover the CPI losses from the prior day, closing higher but still below the recent tops at 93.1920.

Below there, then the downside is vulnerable towards the midpoint of the 92 area that meets the 61.8% Fibonacci retracement level at 92.52.''

''Overall, the Golden Cross (50/200-day EMA bullish cross over) would be expected to lead to a higher US dollar in the coming days and weeks. 

However, the confluence of the 21-day EMA and July 22 lows is a compelling reversion target for the bears that are otherwise having to contend with some meanwhile strength in the greenback.''

Projected path for DXY

''The above chart illustrates the series of fundamental events that have led to the recent Golden Cross on the daily time frame.''