Beijing Lockdown Chatter Spurs GBP/AUD Exchange Rate Higher

Image © Adobe Images

Newswires are reporting Beijing might be heading for a Covid lockdown, raising the prospect for near-term Australian Dollar weakness to extend.

"Hearing reports from CGTN that Beijing is going into lockdown," reported Trading Floor Audio, citing China Global Television Network.

The development builds on extensive reports out Thursday that China would have to impose restrictions in response to surging Covid cases.

The Pound to Australian Dollar exchange rate (GBP/AUD) is looking at a 1% advance already this week and we said in a recent article the tightening of restrictions in China could facilitate further advances.

The Australian Dollar has a 'high beta' to China owing to the strong trade links between the two countries.

There are signs Beijing is readying for a significant outbreak with Bloomberg reporting workers are constructing a temporary Covid quarantine facility of prefabricated structures the size of shipping containers in one of the capital's districts.

"China's Covid cases are at Apr-22 highs, yet, the new policy reaction function is unknown. However, the logic of exponential virus spread, means further lockdowns will likely be required," says economist Callum Bruce at Goldman Sachs.

In another section of Beijing, green tents are being put up in a park "that could be used to house epidemic control staff," said a report.

A conference centre is also reportedly being converted into a makeshift hospital.

Beijing reported a record 1,611 new cases on Wednesday, a significant spike for a city that has kept on top of the outbreak for more than two years.

Bloomberg also reports panic buying amongst residents readying for a lockdown.

"We still see AUD as vulnerable to an unwind of the improved sentiment in China as the risk of more widespread lockdowns increases and, even where constraints are lighter, consumers are only responding very slowly to easing constraints," says Elsa Lignos, Global Head of FX Strategy at RBC Europe Limited.

Above: GBP/AUD is approaching a notable area of resistance, this could slow the recent ascent. If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.

Market sentiment was boosted in October and early November after reports suggested China was reading to step back from its strict zero-Covid approach to handling the virus.

Economists said this would boost demand in the world's second-largest economy, an engine of growth, particularly for the Asian and Australasian regions.

It was only last week that authorities did indeed make moves to ease controls.

But the virus is spreading and these expectations have been dashed as the country maintains a strategy of isolating everyone who is infected as well as all of their close contacts in hospitals or specialised facilities until there is no risk they are infectious.

"The AUD is likely to continue trading on such global factors," says analyst Ashish Agrawal at Barclays Bank in Singapore. "News flow from China could also exert an influence on the AUD, especially if there are renewed signs of tightening in mobility as cases spread."

The winter could be a long and anxious one for Aussie Dollar watchers, but when spring comes around and infections are falling back a more durable opening of China might be on the cards.

This could set up the currency for a strong 2023.