AUD/NZD downside opening up as COVID-19 risk-off prevails

• The COVID-19 spread is bearish for the cross.
• Rallies in the cross will be difficult to sustain multi-week.

AUD/NZD drifted down 40 pips to 1.0260 overnight and is steady in an oddly quiet Asia on Thursday as markets consolidate some of eh volatility form overnight and digest the hectic month of March as we move into the second quarter of 2020. COVID-19 remains at the forefront of the market's and a risk-off theme continues to dominate proceedings, making for a tough time for AUD bulls.

US equity collapse and FX market dysfunction is keeping the bulls at bay

The US equity collapse and FX market dysfunction is keeping the bulls at bay, with Wall Streets shocking start to the quarter a catalyst for the drop in the cross. More on that here: Wall Street Close: Bruising losses in US stocks resulting in the worst start to a quarter on record

"The relationship between AUD/NZD and risk appetite is not always clearly positive but for now it implies that rallies in the cross will be difficult to sustain multi-week as Covid-19 news is sure to worsen," analysts at Westpac explained:

"Yield spreads have actually moved in AUD’s favour in recent weeks, with the RBNZ having to cut its cash rate -75bp versus -50bp for the RBA and markets having already been priced for a 0.25% RBA cash rate, albeit later. Both central banks are pursuing QE, though the RBA is targeting yields while the RBNZ has pledged to purchase a fixed total over 12 months."

Overnight, the Australian 3-year government bond yields popped and retraced yesterday afternoon’s drop, with the yield climbing from a record low of 0.22% to 0.27%, slightly up from the RBA’s QE target of 0.25%. The 10-year yield was also bid, bouncing off 0.64% to 0.72%. Meanwhile, the New Zealand government’s rescue package has resulted in a large increase in borrowings which is chicken and egg at this juncture for the kiwi – stimulus should continue to support optimism. 

"Promised fiscal support is historically very large from both the Australian and NZ governments, though neither economy will escape recession," analysts at Westpac explained.

"Perhaps surprisingly, Australia’s commodity price basket has held up a little better than NZ’s but of course the trade positions of both countries are deteriorating. Our end-June AUD/NZD forecast is 1.03. Near term though, renewed bouts of risk aversion are likely to ensure we see more trade around say 1.00-1.01 than 1.03-1.04."

AUD/NZD levels