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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.

This week ahead: US and Eurozone GDP

On January 11th, China announced its first death related to the Coronavirus. 120 Days later, the pandemic has wreaked havoc in the lives of all. This week ahead marks many important indicators that, in regular times, would be an indicator of the prosperity of the global economy. We now look to the same indicators and quantify the damage Coronavirus has done to our lives and the global economy. Note: Dates are in NZST. 

Coronavirus Cases across the world - ABC News

China’s Inflation rate – Tuesday, May 12th

The People’s Bank of China has been wary of cutting their lending rates in favor of direct approaches, such as bond issues and direct lending – a stark contrast to how many central banks tackled the issue Coronavirus. However, due to implementing one of the strictest lockdown measures at the epicenter of the virus, consumer demand has been shattered. The PBOC in a statement stated that “ there was no foundation for persistent inflation or deflation in the country” Analysts predict a 3.7% inflation rate, down from 4.3%.

Inflation rates US – Wednesday, May 13th

In contrast, the US government has favored bolstering financial stability of households – providing them with stimulus checks to keep the economy afloat. This is on the back of the Federal Reserve announcing an unlimited quantitative easing program. These measures are textbook ways in which the rate of inflation increases in the long run. However, the consensus has been that it is more important to keep the economy afloat and worry about inflation later. Analysts forecast a 1.7% inflation rate, down from a previous 2.1%.

Interest Rate Decision RBNZ – Wednesday, May 13th

With one of the lowest coronavirus fatalities in the world, New Zealand has been praised for its swift and immediate response to the threat of the Coronavirus. However, this has not shielded them from the economic shortfalls a retraction of demand has caused. With the RBNZ expecting to double their quantitative easing measures, it remains to be seen whether their aim of keeping inflation between 1% and 3% is feasible. Analysts predict the RBNZ to keep interest rates at 0.25%.

UK GDP – Wednesday, May 13th

With having the worst fatality rate concerning the Coronavirus of around 16%, analysts forecast the UK to revise their GDP rate down from 0.1% to -2.9%. This is on the back of their Prime Minister, Boris Johnson contracting the Novel Coronavirus. The UK is set to slowly come out of their 7-week lockdown as their infection rates slowly decline.

Eurozone GDP – Friday, May 11th

With the Eurozone thriving over the free travel between Europe’s borders, lockdowns across the continent have severed this fundamental backbone of the European nations. Alongside devastating Coronavirus figures from the UK and Italy, analysts are forecasting a 3.3% drop in GDP year over year, in contrast to last year’s 1% growth.

US Retail sales – Saturday, May 16th

With lockdown measures across the United States and all across the world, in person, retail sales have suffered gravely. Retail sales fell 8.4% in March, with clothing and accessories suffering the worst plunging 50.5% in March. This is on the back of JCPenney and Neiman Marcus filing for Chapter 11 bankruptcy. Analysts forecast a further 12% drop in retail sales.