The Australian dollar went flat on Wednesday as investors fretted about the economic damage a coronavirus lockdown in Melbourne might do to the national recovery.
The Aussie steadied at $0.6941 <AUD=D3> after pulling back from a near four-week high of $0.6998 overnight as surging COVID-19 cases globally turned the mood cautious.
The New Zealand dollar likewise paused at $0.6541 <NZD=D3> having topped out at $0.6580 on Tuesday, just short of its June peak of $0.6585.
Analysts said the new lockdown of Melbourne, a city of five million in Australia's second biggest state of Victoria, was a setback to what had been a solid economic rebound.
Westpac chief economist Bill Evans trimmed his estimate of economic growth to 1.1% for the September quarter, down from 1.5% previously, and that was contingent on the pandemic being contained to Melbourne.
"The unknown variable will be the impact on national confidence of this unexpected development," said Evans.
"The events in Melbourne highlight the risks around the containment of the virus; other shutdowns; and the inevitable savage loss in confidence were that to occur."
Analysts at CBA noted Victoria accounted for roughly 24% of the country's annual economic output and estimated a six-week lockdown of its capital city could shave as much as one percentage point from third quarter gross domestic product (GDP).
The government has flagged that further fiscal stimulus will likely be needed beyond the initial cut-off date of end September, and even hinted at bringing forward large-scale tax cuts to boost spending.
Such a shift would add to already record borrowing needs and put upward pressure on bond yields, which in turn could draw a policy response from the Reserve Bank of Australia (RBA).
Just Tuesday the central bank reiterated it would do whatever was necessary to keep three-year bond yields <AU3YT=RR> down near 0.25% and the debt market functioning properly.
S&P Global Ratings warned events in Melbourne could endanger Victoria's triple A credit rating should the economic disruption last longer than currently expected.
"We expect weaker revenues, including payroll taxes, stamp duties, and goods and services taxes, and increased support and health expenditures," the agency said.
"The negative outlook on our rating on the state reflects that Victoria's fiscal repair could be delayed."
(Editing by Shri Navaratnam)
