- AUD/NZD rallies to the highs levels since 2019 on RBNZ/RBA divergence.
- The case for a lower AUD is clear as far as the eye can see.
AUD/NZD is trading in the 1.0760s having climbed up to the highest levels since November 2019 on the divergence between the Reserve Bank of New Zealand and the Reserve Bank fo Australia.
The case for a lower AUD
We are in a world of deflationary risk and we are seeing the markets adjust to that through the US dollar. The DXY has claimed back the 100 handle as markets prepare for a debt-riddled short squeeze on the dollar which can only spell more danger for commodities down the line. This leaves the Aussie exposed and looking rather precocious. While the RBNZ's bias towards easing has supported a higher cross, when markets start to predict that that RBA will follow suit, this will be the crosses downfall.
Now that the curve of infection rates has flattened in Australia, the federal government gave the green light for states to begin easing restrictions within their own timeline. However, while Australia's score sheet is one of the best when it comes to the economic impact and cases of COVID-19, the economy is far from out of the woods. One of the nearest domestic triggers for weakness in AUD will be when businesses refuse to reemploy staff that they let go of as employers worry about a second shutdown pertaining to the spread of COVID-19.
The economy is highly dependent on the population spending – yet house prices have been forecast by the big banks to crash. However, the pillars of inflation, money velocity (spending) and mining CAPEX, when pulled from under the economy, with a flight to the greenback and the RBA's inability to respond to the economic crash fast enough, this will be the demise of AUD. The RBNZ, on the other hand, is ahead of the curve, which could give the NZ economy more of a soft landing.
Meanwhile, yesterday’s "mega Budget flagged a rise in NZGB issuance to $60bn in the year to June 2021, way more than any forecasters had tipped," analysts at ANZ Bank explained:
Many in the market are likely betting that QE will be expanded and there is a strong signal for this in the Finance Minister’s letter of indemnity to the RBNZ, which explicitly indemnifies the Bank for up to 50% of nominal and 30% of linker outstandings. That being the case, the focus for the market should perhaps be that, rather than $60bn (although that is the QE cap for now and expanding it would require MPC approval). That has got to at least take some of the heat out of yesterday’s shock.
AUD/NZD levels
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended content
Editors’ Picks
AUD/USD remained bid above 0.6500
AUD/USD extended further its bullish performance, advancing for the fourth session in a row on Thursday, although a sustainable breakout of the key 200-day SMA at 0.6526 still remain elusive.
EUR/USD faces a minor resistance near at 1.0750
EUR/USD quickly left behind Wednesday’s small downtick and resumed its uptrend north of 1.0700 the figure, always on the back of the persistent sell-off in the US Dollar ahead of key PCE data on Friday.
Gold holds around $2,330 after dismal US data
Gold fell below $2,320 in the early American session as US yields shot higher after the data showed a significant increase in the US GDP price deflator in Q1. With safe-haven flows dominating the markets, however, XAU/USD reversed its direction and rose above $2,340.
Bitcoin price continues to get rejected from $65K resistance as SEC delays decision on spot BTC ETF options
Bitcoin (BTC) price has markets in disarray, provoking a broader market crash as it slumped to the $62,000 range on Thursday. Meanwhile, reverberations from spot BTC exchange-traded funds (ETFs) continue to influence the market.
US economy: slower growth with stronger inflation
The dollar strengthened, and stocks fell after statistical data from the US. The focus was on the preliminary estimate of GDP for the first quarter. Annualised quarterly growth came in at just 1.6%, down from the 2.5% and 3.4% previously forecast.