AUD/NZD: A toss-up between US/CNY, RBA and RBNZ

• Coronavirus dominates the G10-FX space, and antipodeans directly traded as a proxy.
• RBA and RBNZ meetings in March will be critical.
• A run towards the 2020 lows in the 1.0310s on a break below 1.0390/00.
• Should the recent lows hold, 1.0450s will be back in play in the near-term.

AUD/NZD has met a series of offers over the daily time frame with bearish wicks in a near-term period of small scale distribution since the Feb peaks of 1.0505. A bullish bias remains in play on a near-term technical outlook above 12th Feb lows of 1.0397, although economic fundamentals do not fully stack up for the bulls at this juncture. AUD/NZD is trading at 1.0411 at the time of writing, +0.13 within a range of 1.0394 and 1.0419. 

The cross has been travelling in a long period of accumulation since 2013 with multiple tests of parity or close to it. With both central banks easing towards unprecedented low levels of interest rates and little prospects for either economy to recover from low levels of inflation, the jury remains out on which nation will reach zero rates first, but the bias is firmly towards the downside for both.

The coronavirus is a black swan event for 2020 and there is no telling how severe the situation will get from here, nor how badly affected the antipodeans will be on an economic scale. One thing is for sure, risk-off markets will continue to weigh on both currencies and the average true daily range between AUD/NZD will likely remain at a constant as the cross moves to and from the daily volume point of controls.

A bullish scenario for AUD over the kiwi

Meanwhile, the number of new confirmed COVID-19 cases in mainland China has improved, which is helping the CNY to stabilise after its initial weakness. This, in turn, should support the Aussie. Should there be a continuation of yuan strength, which has a huge void to fill considering the amount of ground lost to the trade wars, there lies within a bullish scenario for AUD over the kiwi.

However, markets will be keeping a watchful eye on the Australian economy, which, in recent data, has proven to be more fragile than first thought in the start of 2020 considering the recent deterioration in the unemployment rate again, popping from 5.1% back to 5.3% in the latest reading. Secondly, we have seen Construction details disappoint, which will directly weigh on Gross Domestic Product. Today's trend estimate for total new capital expenditure also fell, falling by -1.4% in the December quarter 2019. This follows a fall of -1.3% in the September quarter 2019. These types of numbers are going to weigh on the sentiment for the Reserve Bank of Australia's meeting next month. 

An insurance cut from RBA expected? 

The RBA will have noted that the impact of the epidemic on the Chinese and global economy will become more apparent as data become available in the coming weeks and months, so this raises prospects of an insurance rate cut from the central bank, perhaps as soon as March, or more likely, in April, especially if the economy deteriorates between meetings. 

As its stands, according to analysts at Westpac, "markets are pricing a 10% chance of easing at the next RBA meeting on Tuesday, and a terminal rate of 0.34% (RBA cash rate currently at 0.75%). Market pricing for Reserve Bank of New Zealand implies a 30% chance of easing at the next meeting on 25 March, with a terminal rate of 0.68% (RBNZ OCR currently at 1.0%)." 

That outlook is starkly different from what had been first perceived following the latest RBNZ meeting. The bank OCR forecasts were implying that the RBNA does not intend to cut the cash rate again. All in all, the data justified the bank upgrading its forecasts and removing its easing bias, but the markets could well be pricing in a more adverse effect from the coronavirus at this juncture. However, considering how the yuan correlates to the Aussie, any further deterioration in value to the US dollar, this will leave considerable downside risk to AUD/NZD on a more dovish outcome from the RBA the next meeting around, especially if we see an adverse turn in coronavirus situation in Mainland China.

AUD/NZD levels

We have a head and shoulders pattern in development as the bulls struggle beyond the recently printed Feb highs with prospects of a run towards the 2020 lows in the 1.0310s on a break below the point of control around 1.0390/00. However, should the recent lows hold, 1.0450s will be back in play in the near term. On a break above 38.2% Fibonacci of the Nov 2019 - YTD low range, 1.0590 will be a focus ahead of the 61.8% golden ratio of the same range up at 1.0650.