What’s driving the AUD and a case for NZD strength against the AUD

AUD: RBA in focus for tomorrow

The AUD has whipsawed around lately after Governor Lowe's latest speech on unconventional policy on Tuesday of this week. Although Governor Lowe said that the RBA's lower rate level was 0.25% and QE would not be even considered before rates hit that level, the market has taken a bearish outlook on his view. The investment banks Westpac and RBC forecast that the RBA will cut the cash rate to 0.25% by June 2020 and follow that up with QE. So, as the market starts to price in additional cuts from the RBA the focus will be on economic data and speeches that confirm or deny this outlook. A rate cut is not expected for tomorrow’s rate meeting, but the market will be looking for any signals from the RBA about a coming rate cut for 2020. One final aspect to mention is that the Australian economy is closely tied to China's fortunes with around 30% of its GDP coming from trade with China. Therefore, AUD will be pushed or pulled along with the US-China trade sentiment too.

What’s driving the NZD?

In early August this year the RBNZ cut interest rates by a surprise 50bps at their rate meeting. Governor Orr was very bearish in his language at the press conference and he didn’t rule out the RBNZ needing to take further action. He saw negative interest rates as an option and even the prospect of QE. So, in November the RBNZ was expected to cut interest rates further from 1.00% to 0.75%. This did not happen and the RBNZ surprised markets again, but this time by staying on hold. The RBNZ is now in a wait and see mode. Furthermore, latest NZD business confidence data has been supportive for the NZD showing a firm recovery from latest lows.   Goldman Sachs consider the NZD to be one of the biggest beneficiaries from Yuan appreciation on a US-China trade deal signing and tariff rollback. GS’s economists are anticipating a moderate recovery in the NZD economy through 2020, so there could be some support for NZD and more downside in AUDNZD as the two central banks diverge in their outlooks.

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