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NZD/AUD – Battle Of The Interest Rates

NZD/AUD is approaching a robust congested area at around 0.925. A downwards channel sees a possible move further lower may see the pair come a level below 0.9. However, an action lower will be dictated on which economy puts the brakes on monetary stimulus first.

NZD/USD Looking To Test That Support At 0.925

NZD/USD - Monetary policy dictated by the state of the economy

During the peak of the Coronavirus, the best method of suppressing the virus was not evident. This is where Australia and New Zealand's strategies diverged.

Australia went for a loose lockdown, allowing citizens to roam freely without restricting them to their houses. They did enforce social distancing laws alongside mask-wearing.

New Zealand went for a strict lockdown, only allowing citizens to leave their house to exercise, get groceries and go to the doctors. Essential workers were given a pass to go to work.

It became evident as to what method was more successful. There were critics initially questioning New Zealand's method, pointing to the likes of Australia and Japan, who were getting similar results to New Zealand per capita, however, without the devastating economic cost of a lockdown. Those critics were soon to be silenced after New Zealand slowly pulled out their nearly six-week lockdown, well on their way to recovery. On the other hand, Australia had a devastating second wave that forced the inevitable – a strict lockdown. However, by then, New Zealand was back open and running.

With a head start in Australia's economic recovery, New Zealand has been showing signs of slowing its fiscal and monetary policy measures. Recently, The Reserve Bank of New Zealand (RBNZ) re-instated policies regarding mortgages issued by banks, which require house investors to front up 40% of the house sale price if they want to purchase a house. These were temporarily removed during the peak of the Coronavirus in 2020 to stimulate the economy. However, they were placed back after the national median price jumped up to $730,000, up 19.3%.

However, a country that is heavily dependant on tourism is struggling due to the strict border controls. Westpac analysts predict New Zealand's GDP to fall 0.7 over the six months to March due to the lack of tourists. Dominick Stephens stated that "tourism is highly seasonal, and there is normally a strong net inflow of people into the country in the summer months. The absence of visitors was felt keenly in the December quarter, and will be even more so in the March quarter, which would have otherwise been the peak tourist season."

Australia Closing In On New Zealand Coronavirus Lead

Australia has not had a good time dealing with the Coronavirus. Outsourcing security of their quarantine to a private company did not end well, with the spread of the virus being exacerbated by the security guards sleeping with the Coronavirus guests. This, alongside lax state line restrictions, pushed Coronavirus cases up, forcing two lockdowns. However, there is some optimism in the Australian economy, with many of their commodities' prices reaching all-time highs. Furthermore, the Reserve Bank of Australia stating that the "recovery in the second half of 2020 had been faster than initially expected."

I believe the economy that starts tapering monetary policy programs will first see their currency strengthen against the other. With the RBA stating that they are "committed to doing what it reasonably could to support the Australian economy" and that "significant monetary support would be required for some time," it looks like New Zealand in the mid to long term will be raising rates before Australia will, given the actions they took with loan-to-value ratios, alongside the consistent recovery from the Coronavirus.

NZD/USD at 0.77c by the end of 2021?

The New Zealand Dollar against the U.S Dollar has been a good barometer for the state of risk-on assets. It currently sits at around 0.7195, with technicals showing a possible strong move in the future. We now see a flat bottom wedge forming, with the wedge's completion seeing the NZD/USD make a violent move to the upside.

NZD/USD flat bottom wedge forming

Historically, the price is in an area prone to intense swings to the upside and the downside if we look left.  A move to the upside may finally bring 0.74c on the table, while a break of the flat bottom wedge before completion may see a move back to 0.70c. However, New Zealand's fortunate spot in eradicating the virus may allow tailwinds to support the technical possibilities.

Positive inflation numbers decrease the likelihood of further rate cuts

In the latter part of January this year, New Zealand's inflation numbers were better than expected at 1.2%, strongly surpassing analysts' forecasts of 0.2%. Jarrod Kerr, Chief Economist at Kiwibank in Auckland, stated that "the medium-term outlook for inflation looks stronger compared to just a few months ago."  Like many analysts, Jarrod has reversed his viewpoint for more RBNZ cuts this year. This comes as many New Zealand retail banks such as ANZ and Westpac see that New Zealand's sharp recovery due to successful Coronavirus measures is likely to affect further rate cuts coming down the line. Both banks have retracted their rate cut predictions.

Unemployment beats expectations

Analysts predicted a rise in employment in the past quarter, with the RBNZ predicting unemployment rising from 5.6% to 5.3%. However, with numbers showing a drop to 4.9%, any optimism in rate cuts has all but vanished. Capital Economics further emphasized their view that interest rates in New Zealand would rise from next year.

BNZ's Forecasts for RBNZ's Interest Rates

Both are no doubt positive for the New Zealand economy and its citizens. However, this will turn the New Zealand dollar into a missile. Stephen Toplis, Bank of New Zealand's head of research at Bank of New Zealand, stated that they are "formally building a rate hike [in their model] in May 2022" and that this may be "pouring fuel on the New Zealand Dollar that is already on fire." Many other senior economists are conveying the same viewpoint, with ASB's senior economist Mike Jones stating saying that the RBNZ's and fiscal stimulus "has done the trick, and no more is required."

With a surging house market, lower than expected unemployment, and higher than expected inflation, alongside favorable technical, the New Zealand dollar may be poised for a move upwards.

NZD/USD – What's In Store For The Kiwi?

The New Zealand dollar against the U.S. dollar is facing a critical fundamental event tomorrow: RBNZ's Interest Rate decision. New Zealand has been fortunate that the government's decision to go "hard and fast" has meant citizens have had relative freedom through Christmas and New Years'.

NZD/USD eying out RBNZ meeting

The NZD/USD is currently sitting at around 0.732, up around 1.37% over the past week. Bulls are looking for positive signs to take the pair 0.74 and higher, such as a lifting in the extraordinary bond purchases the RBNZ is engaging in.

NZD/USD Looking At Key Levels

New Zealand was also in a fortunate position that many of the country's citizens could afford. A lockdown and was employed through the lockdown.

With a mix of government support alongside jobs that enabled work from home, many citizens were in a position to save during the lockdown periods. Pair this with the Reserve Bank of New Zealand, removing loan to value ratios to stimulate the economy, and we have a legendary demand and house price increases across the board as investors and first home buyers take advantage of easy borrowing.

However, the RBNZ has realized that the temporary lifting of the loan-to-value ratio has done its course. They recently announced that they would place these restrictions back, requiring investors to have at least 40% of the house price they want to purchase as a deposit.

NZD/USD looking at any possible rate change

Now, analysts are looking at whether the RBNZ will translate viewpoint into monetary policy. As it stands, analysts predict the RBNZ to hold rates as is at 0.25%. If so, it is likely to state that they will be willing to keep rates well into 2022. A sudden rake hike makes signals the RBNZ may be more bullish on the New Zealand economy. Stephen Toplix, head of research at Bank of New Zealand in Wellington, stated that the RBNZ "simply must be less dovish" than it was in November because inflation has portrayed a more robust.. economy than was expected."

To be clear, house prices and housing demand are not an exact bearing of economic growth. Nor is it a mandate for the Reserve Bank of New Zealand. However, rampant leveraging in higher loan-to-value ratios implicitly affects an order the RBNZ does preside over: employment. To RBNZ, riskier loans place higher pressure on borrowers to make higher payments, possibly putting them into a position of insolvency from the smallest change in their financial conditions.

NZD/USD - A pair to watch tomorrow.

NZD/USD on its way to 0.74?

Are we going to see the NZD/USD at 0.74? With Joe Biden most likely to be the next President, many predict a de-dollarization to occur as the opportunity cost of investing in the United States is expected to decrease, placing pressure on the greenback downwards.

Dollar index down 10% from its March highs

NZD/USD - Countries are polar opposites

This pair is interesting, as both countries are on the opposite spectrum regarding their handling and current situations with the Coronavirus. In New Zealand, the Coronavirus is virtually nonexistent, with citizens having relatively no restrictions.

Prime Minister Jacinda Ardern showing the 4 Coronavirus levels.

In contrast, the Coronavirus in the United States continues to ravage the country, with cases yesterday topping 130,000. Biden promises to put the Coronavirus front and center, as he believes that the only way to a successful economic recovery is to eliminate the Coronavirus.

NZD/USD - Japanification?

RBNZ's government debt holdings reach similar levels as the Bank of Japan in 7 months as suppose to 3 years

However, both countries’ central banks have been on a quantitating easing spree to prop their respective economies. Research done by Bloomberg alongside data from the Reserve Bank of New Zealand shows that the RBNZ’s ownership of government bonds has risen from 6% to 37% in the span of seven months. Many compare this as a “Japanification”  in New Zealand, as the Bank of Japan underwent a similar process – only they started at 11% ownership, and it took them three years.

Fed's balance sheet went to 4 - 7 Trillion in 7 months

Similarly, with the Federal Reserve, Jerome Powell has taken the central bank from 5 Trillion in Assets to just around 7 Trillion, supporting the bounce bank in asset prices worldwide.

Governments are okay with debt, as long as they grow faster than their debt

In general, central banks and governments are okay with debt growth and can sustain large deficits for decades as long as GDP grows faster than the debt. Regarding New Zealand and the United States’ borrowing and their respective currencies, the ultimate strength is from the underlying recovery relative to one another.

As the United States’ recovery from the Coronavirus arguably has not started, investors and traders may look elsewhere to park their money.

In a broader sense, investment into the United States may be delayed/canceled due to the current Coronavirus situation or worse; investors may look elsewhere to park their investment.  This is where New Zealand comes into play. As the country is well underway in its recovery, investors may be looking at New Zealand as a place to park their capital.

A survey of 700 global business leaders by Bloomberg ranked New Zealand as the nation that has best handled the pandemic and where they would be most confident investing in. Furthermore, with negative interest rates predicted next year alongside tools to allow retail borrowing near the interest rates, alongside their positive effects most likely to be felt during a recovery, investors will inherit conditions that are most likely to be favorable for their investment.

NZD/USD - technically set for 0.74?


As far as technical go, the NZD/USD is undergoing a possible head and shoulders on a longer-term timeframe, with the price level hovering around 0.68290, which is around a 100% Fibonacci retracement level. If net-investment into New Zealand is larger and faster relative to the United States, we may see the NZD/USD rocket price up to 0.74, not seen since the start of 2019.

New Zealand Dollar – upwards into the elections?

Similarly to the United States, New Zealand has its elections coming up in 25 days. What's the future of the New Zealand dollar once a party is enacted?

Prime Minister Jacinda Ardern on the left, National Party Leader Judith Collins on the right

Generally speaking, there are two "main" parties in New Zealand – national and Labour. From a thousand miles away, National vs. Labour would be compared to Democrats vs. Republicans. National can be categorized as "pro-business' – Lowe taxes, fewer benefits. Labour can be known to people for having "socialist" policies – higher support for students, higher taxes for the rich, etc.

Therefore, if National wins, this would provide a push for the New Zealand dollar. Similarly, a possible push downwards if Labour wins.

NZD/USD over 4 years

The New Zealand dollar is currently sitting around 0.65, firmly rejecting that 0.68 cent level forming a double top before firmly falling. We can see that 0.68 cent level has been a healthy historical support/resistance level since 2016.

Therefore the question becomes, who is poised to win the election?

An article in the Financial Times regarded New Zealanders for their "humility" and their "[tendency] to view the mass Euphoria that characterizes US political campaigning with suspicion," suggesting that New Zealanders tend to steer their eyes towards the center-left Labour party.

The party leader of the Labour Party, Prime Minister Jacinda Ardern, has been praised for her empathic response to the horrific Christchurch Shooting, which killed 51 Muslims, a deadly volcanic eruption on Whakaari Island, and her handling of the Coronavirus.

On the other side of the aisle, we have the National Party with Judith Collins at the helm. Judith has been struggling with the National party's misfunction's initial tailwinds, having switched leaders three times in the past year. Judith Collins has been struggling against the popularity of Ardern lately. Their attack on the economic damage of Labours' "go hard, go fast" approach to totally eliminate the virus has been met with fierce criticism due to the public being generally approving the policy. To date, there have only been 25 deaths regarding the virus.

As of the current polls, Labour is set to win with a wide margin. 1 News poll showed yesterday that Labour was on 48%, with National party on 31% - this could see Labour forming the first single-party government since 1996 – the year New Zealand moved from the First past the post system to MMP.

However, does it matter who wins in the long term?

In the United States, the difference between the constituents in Democrats and Republicans are quite polarizing. However, in New Zealand, the difference is not as great as that of the United States. Some even question whether National and Labour's policies are much different in the first place. If you look at their social media presence, they attach each other like what the other party is doing would destroy the country.

However, an article from the Spinoff, a news provider in New Zealand, summed up the politics between the two parties greatly – "How did we end up with two parties that are pretending to do things differently?" Hotelling's Law, created by Harold Hotelling in 1929, helps explain why this happens. In summary, both Labour and national policies end up near the middle, to appeal to the most voters, which is why they look very similar.

Therefore does it matter who gets into power if the policies are quite similar? In the long run, probably not. For New Zealanders? Again, probably not. But for the markets? Most likely, yes.

New Zealand dollar to 70c?

As the dollar continues, it's a downward spiral, risk-on currencies such as the New Zealand dollar have seen a rise in value. I have talked about how the market is slowly pricing in the long-term effects of the Coronavirus on macro-environments, and it seems like the Currency markets are gradually displaying this.

NZD/USD in Blue, CAD/USD in Teal, EUR/USD in Orange, GBP/USD in Red

New Zealand returns higher than it's peers

The New Zealand Dollar is up 9.06% against the USD. However, at the same time, we see the Pound, Euro, and Canadian dollar only up 4.76%, 7.45%, and 5.35%, respectively. We can interpret the returns in the light of the Coronavirus and the respective geographical macro environment. The United Kingdom has been hit hard with the Coronavirus amongst battling with Brexit woes. Canada has had a relatively successful Coronavirus response, without having to resort to a strict lockdown, and Europe having hot spots of the pandemic, however, have had a cohesive response to the pandemic, coming up with a 750 Billion Euro recovery fund to fight the economic damage caused by the Coronavirus.

However, no nation has gone as hard and fast as New Zealand, going from citizens have relative freedom to lockdown in less than a week. New Zealand's relatively quick response may have come at an economic cost. However, it is similar to ripping the band-aid off as quickly as possible. This high initial cost may prove beneficial for the nation down the line, and the market is pricing this in accordingly with the appreciation of the New Zealand Dollar.

An increase in demand for the New Zealand Dollar may come from being one of the first countries to reopen their borders to foreign nations, with talks of an Australian bubble coming by the end of this year and a Cook island Bubble as soon as next month. Furthermore, as equities slowly price in the effects of the Coronavirus in the future, overseas investors may find New Zealand equities favorable.

However, investors should watch out for further rate cuts from the Reserve Bank of New Zealand, which currently hold interest rates at 0.25%. If the RBNZ continues to purchase bonds at the current rate they are now, they will run out of bonds to buy by the end of this year unless they lower their standard on the bonds they purchase. If not, they will have no other choice but to dip into negative rates.

Currently, the NZD/USD pair is consolidating in the 0.66 range. A push to 70c, a level not reached since June 2018, would require both an increase in demand for the New Zealand dollar and a decrease in demand for the US Dollar.

Future of the US Dollar

As the Coronavirus started to wreak havoc across the world, the US dollar stepped up as the world's de-facto currency. Risk-off sentiment drove investors and traders to the US dollar in droves, pushing the US dollar to highs not seen since 2017.

US Dollar Index

The world's de-facto currency, making up over 60% of all known central banks' foreign exchange reserves, saw the FED offering swap lines to central banks to provide liquidity in the market by "swapping" their currency for US dollars. However, the dollar's strength may be short-lived as the market sentiment cautiously shift to risk-off assets.

Risk-off shown by demand for FX Swaps for the US Dollar

Thanks to the FED's swaps, demand for the US dollar across the world have been met, restoring equilibrium in the market. This was shown in a chart from Steven Englander of Standard Chartered Plc,

There may be more headwinds for the US dollar. As we all know, everything depends on the assumption on how we emerge from the Coronavirus pandemic. If we assume that we shall see an economic recovery with the markets discounting a second wave, we should see the USD depreciate back to pre-coronavirus levels. Furthermore, there are a couple of other factors that may help the dollar depreciate

Quantitative easing increases the supply of the US Dollar

Federal Reserve's balance sheet

With the Fed's balance sheet swelling up to $7 Trillion, they have been loosening their limits on what assets they are willing to purchase. They have recently added corporate bond ETFs to the lists of assets they are ready to buy. With quantitative easing and stimulus comes an increase in money supply, which historically has seen the currency in question to depreciate (See Euro and the ECB in 2015, Government Stimulus in the US in 2009, and Bank of Japan in 1997)

Low rates for a longer time

"We are not even thinking about raising rates", Jerome Powell stated at a conference earlier this month, showing that they are willing to provide accommodative financial conditions until 2022. This also means investors may want to see their money earn a return else wear where yields are relatively higher, especially in EM currencies.

Higher oil prices

Since oil transactions are denominated in US dollars, there is an inverse relationship with oil prices and the US dollar. Correctly, as oil prices increase, the pressure is put on the US dollar as producers convert more US dollars to their home currency.

If we see a promising recovery, there is a high likelihood we a sharp depreciation in the US currency. 

Markets are mixed while currencies range

Markets the US and around the world are mixed as investors and traders take a cautious stance on the economy. NASDAQ edges a 0.29% gain, while the S&P 500 and Dow Jones ended lower at 0.78% and 1.09%, respectively. AUS 200 edges lower.

NASDAQ in Red, S&P 500 is in Blue, Dow Jones is in Orange

Equity markets end fundamentally mixed

With the Coronavirus still front and center for many, investors are taking solace in "Coronavirus proof" equities – primarily in tech with their cashflow generating abilities during a downturn and their fortress balance sheets. This is on the back of Fed chair Jerome Powell stating that "we [the Fed] are not thinking about thinking about raising rates." However, it would be unwise to fight against them propping up the market. If they are committed to asset purchases alongside no drastic negative news with regards to the Coronavirus, major indices should continue to tick up. It is interesting to note the Fed's current dynamic, which is essentially a full believer of the markets during a boom, seem to doubt their ability to price securities in a downturn.

Currencies also end up mixed

Many currencies have been ranging with no significant moves to the upside or the downside. The cable has been fluctuating from 1.252 - 1.257, while the AUD/USD and NZD/USD have been trading between 0.68 -0.69 and 0.64-0.65, respectively. Currencies have been heavily affected by the risk of/risk-off dynamic that has been played out recently in the markets. Traders have been flocking to the USD on any negative sentiment due to the Coronavirus, and vice versa, when positive signs emerge.

The oil markets have a long way to go

Cushing Oil storage show that oil inventories have been decreasing

Oil markets have been struggling to cover the gap that was caused due to the Saudi / Russia price war and the Coronavirus. Brent and WTI are currently at $40.45 and $37.87, respectively, trying to cover that gap to $45.65 and $41.61, respectively. Furthermore, OPEC states they are committed to continuing the initial price cuts until the end of June; however, it maintains their bearish stance on oil demand. They forecast a drop of 9.1m barrels per day by the end of 2020.

With traders and investors experiencing relatively low-volatile trading days, this may be an excellent opportunity to assess current and future positions without the fear of the markets whipsawing against one's trade.

Federal reserve keeps printer steady as rates remain unchanged

The Federal Reserve kept their interest rate target unchanged at their latest conference on Wednesday.

As the death toll rises by 2% in the United States to 1.06m, Chairman Jerome Powell states the Federal Reserve remains steadfast in assuring that they are using the ”full range of tools” accessible to them “forcefully, actively and aggressively” until they are confident that the United States is on the road to recovery. This is on the back of their announcement in March of unlimited purchases of asset-backed securities and treasuries to support liquidity in the markets. The FED’s balance sheet has increased from 4 Trillion to 7 Trillion since that announcement. 

10-year treasuries dipped slightly on the news, edging up two basis points to .63 percent. Furthermore, the dollar index is down .36 percent. The dollar has slipped against risk on currencies such as the NZD and AUD as New Zealand and Australia transition out of lockdown.

Traders have recently been risk on with the NZD/USD pair, booking gains in the past 5 days. Alongside the risk on dynamic due to New Zealand slowly coming outside of lockdown, attention has been brought to New Zealand’s “Investor Visa.” Investment Banker Troy Bowker floated the idea of offering a visa to high net worth individuals who invested $50 million each in the country. Currently, New Zealand has two investor visas – 3m Invested for 4 years and 10m Invested for 3 years. 

However, Anish Lal – an analyst at Blackbull Markets gives a technical read on the recent bull run on the NZD/USD pair. He stated that the “55c level was a decade low, and that buyers sought that to be a “buy the dip” opportunity to bring back levels which are on par with the dollar” and that “the initial weakness of the NZD was due to the RBNZ cutting rates before the Federal Reserve.”  With a majority of central banks having cut rates to near 0, it has become a “level playing field” in terms of yield to play on.

The AUD has posted similar gains against the USD, also booking gains for the past 6 days as the demand for commodities such as copper and iron slowly pick up.

This risk on dynamic has also been reflected in the equity markets, with the SP500 and the NASDAQ up 2.6% and 3.6% respectively. However, with countries being at different stages of the coronavirus recovery, it is yet to be seen whether this risk on dynamic has some meat behind it, or whether it is just cautious optimism slowly seeping its way into the markets.

NZD Bolstered By End Of Lockdown Announcement

The New Zealand Dollar made a jump at 4am GMT today, during a press conference where New Zealand Prime Minister Jacinda Ardern announced that the country would be ending its Level 4 lockdown at the end of Monday 27th April, one week from now. New Zealand will move back down to Level 3 of its alert phase.

Immediately after the announcement was made, the NZD rose by almost 0.6% to a high of 0.6058 to the US Dollar. The Kiwi Dollar had been picking up momentum over the past week, boosted by positive data surrounding the number of daily COVID-19 cases, and this announcement is sure to extend that momentum further.

Since the 15th the number of daily new cases of coronavirus in the country has been consistently under 20, leading investors to become more optimistic that the lockdown would end soon and businesses could open again.

However life under level 3 is still mostly similar to that of Level 4, only with less restrictions surrounding essential businesses. Employees are still being asked to work from home if possible, and retail businesses and restaurants can only open if they can provide non contact methods of purchasing such as online shopping or takeaways. Therefore, this move seems to have been made to minimise the risk of a potential outbreak as well as how widespread it would be, while giving citizens a reprieve from the strict lockdown rules of the past month, and allowing the economy to begin recovering in some capacity, even if it's limited.

In other news WTI crude oil dropped below $15 a barrel today, a drop of 8%, and is continuing its freefall. These prices for oil are now the lowest since 1999. As outlined in my article last week, oil is suffering heavily from a lack of global demand, as oil consumption has gone down 30% just in the last month alone, and it seems that the deal reached between OPEC and Russia to pull back production has been unable to correct oil prices. This deal will also not come into effect until May, which is most likely why oil did not see any movements to the upside after the announcement.

We are continuing to live stream on YouTube on weekdays from 10.00 am GMT. Hosted by our expert team of analysts, Anish Lal, Philip van den Berg, and Andre de Almeida, who are ready to answer any questions you may have, so come in and ask away. To see what one of our streams looks like, you can click below to see a recording on our channel: