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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.

Is the future for the Australian dollar downwards?

AUD/USD has been a strong performer in the currency markets, returning just under 30% since its March lows. We talked about how the Australian dollar was poised for a rally on a market recovery earlier this year.

Australian Dollar selling off in the past couple of days

The market has recovered, and the Australian dollar has recovered with it. This was due to the Australian dollar being mainly a "commodity currency," with manufacturing worldwide slowly starting to pick up, specifically in China. Erik Nelson from Wells Fargo stated that "If you consider some of the fundamentals in Australia, you can justify the valuation of the Australian dollar at current levels" and that Australia is "very well positioned right now" about its exports to China.

However, the AUD/USD has fallen over 3% in the past couple of days. This has been on a multitude of factors, the US Dollar strengthening on Donald Trump's recovery, recent weakness in the oil prices, and the tremulous Coronavirus situation in Australia have pushed the Aussie lower.

Is this a long term trend for the Australian dollar, or just Market Volatility?

Yesterday, the RBA left rates at 0.25%, which it has been since the initial rate cut in March. RBA's Governor Philip Lowe stated that the decision was based on the uneven recovery of the global economy due to the Coronavirus – "The global economy is gradually recovering after a server contraction due to the pandemic. However, the recovery is uneven and its continuation is dependent on the containment of the virus".

Analysts are predicting a rate cut in the next six months. However, there is little chance for rates to fall into the negative as Governor Lowe historically has been against negative rates, citing that they are "extraordinarily unlikely in Australia" due to the documented downsides on consumption sentiment.

Furthermore, Australia has been able to control its second outbreak in the state of Victoria, enabling them to focus on the path to recovery from the Coronavirus. The RBA also stated that "Labour market conditions have improved somewhat over the past few months and the unemployment rate is likely to peak at a lower rate than expected"

With elections coming up in the United States, the Trans-Tasman bubble between New Zealand and Australia coming to fruition, and Australia slowly recovering, market volatility may affect the AUD/USD pair, rather than a long term trend. I believe the Australian dollar's tailwinds are a lot stronger the potential headwinds it may face.

Anish Lal has some excellent analysis on the recent market drop due to Trump's tweet - you can watch it here.