- AUD weighed by domestic factors

- NAB lower economic growth forecasts

- House prices to fall by around 10-15%

- Unemployment at 9.6% in early 2021

Above: A Melbourne street during lockdown. Image © Adobe Images

GBP/AUD spot rate at time of writing: 1.8248Bank transfer rates (indicative guide): 1.7609-1.7737FX specialist rates (indicative guide): 1.7824-1.8084Get a bank-beating FX quote hereGrowth forecasts for the Australian economy have been slashed by economists at NAB as they account for the economic impact of the lockdown in the state of Victoria, which is expected to knock 3.0% off the country's overall GDP.

The findings will serve as a sharp reminder that while global factors remain broadly supportive of the Aussie Dollar, domestic headwinds continue to blow strong.

The Australian Dollar's value is broadly speaking a function of 1) global equity market moves, 2) global commodity price dynamics and 3) domestic developments concerning covid-19 and the Reserve Bank of Australia's response to economic developments.

The lockdown in the state of Victoria in response to a second spike of the covid-19 virus has blunted Australia's economic recovery from an initial lockdown in March and April, and will therefore ultimately delay the speed at which the Reserve Bank of Australia can normalise its policy settings by raising interest rates and ending quantitative easing.

RBA policy is by no means the most aggressive and is therefore on balance relatively supportive of AUD, particularly when compared to New Zealand, but unexpected economic strife could well prompt a more cautious RBA going forward and therefore limit AUD's ambitions.

"The move in early August to stage 4 restrictions Melbourne, and stage 3 for the rest of the State, and fears of further spread, has led to a significant downgrading of our economic outlook," says Tony Kelly, Senior Economist at NAB. "The restrictions in Victoria could well reduce Victorian output by around 15% in Q3. Nationally that would take around 3 per cent off Q3 GDP."

The developments come as the Australian Dollar finds itself stuck in recent ranges against many of its major peers and is looking for fresh impetus:

The Pound-to-Australian Dollar exchange rate is seen trading right back in the middle of its August range at 1.8266, giving further certainty that the near-term outlook will unlikely result in any sizeable directional changes for this exchange rate.

A reminder that the top of the range is at 1.84 and the bottom is at 1.8125. (If you have impending international payments and want to lock in current rates for future use, thereby protecting your budget, please learn more here).

The Australian-to-U.S. Dollar exchange rate is meanwhile back at 0.7173, having been as low as 0.7152 during the past 24 hours, a relatively small range given the scale of the stock market rally which would typically be expected to lead to outsized gains in the Aussie.

While external drivers such as global equity markets and commodity demand from China remain supportive of the Aussie Dollar, the domestic picture remains challenging and will likely limit the currency's ambitions.

NAB Monthly Business survey data suggests that consumption and the broader economy was maintaining its recovery momentum until late July, even if capacity levels were still well down from late last year. Meanwhile it was noted by NAB economists that forward orders at Australian businesses did not really improve in July and confidence retreated significantly – all before the Victorian stage 4 restrictions.

Over the course of 2020 NAB now see output down around 5.7% nationally including a fall of 6.25% in Q2 (-3.8% in year average terms).

"With the withdrawal of current fiscal stimulus in early 2021 we don’t really see a rebound in growth till mid 2021. As a result we see GDP rising by around 3% through 2021 –but less than 1 per cent in year average terms, with GDP not returning to its end 2019 level until early 2023," says Kelly.

NAB say Australian unemployment is expected to peak at around 9.6% in early 2021, and to still be around 7.6% by end 2022. It was reported on Tuesday that Australian employment fell by 1% over the month to August 08, with the brunt of the decline being driven by the deterioration in Victoria.

The Australian Bureau of Statistics (ABS) reported payroll jobs for the period fell 2.8% in Victoria, which has suffered the biggest decline in employment since mid-March.

"One implication of this is wages growth will remain lower for longer, as will inflation," says Kelly.

With inflation expectations to remain low, the prospect of the Reserve Bank of Australia normalising monetary policy is diminished.

For foreign exchange markets, currencies will tend to benefit if their central bank normalises sooner and faster than their peers.

NAB also expect house prices to fall by around 10-15%; while prices are likely to fall in all states this will be led by Sydney and Melbourne which will be impacted by slowing population growth and increased supply.

"While the focus is currently on Victoria due to introduction of stage 4 restrictions, no state/territory is immune from the fall-out of COVID-19. While high frequency indicators such as NAB’s internal data and google mobility have notably weakened in Victoria, they have softened in the other states as well," says Kelly.