AUD/NZD: RBA will be critical for the direction of play from here

• AUD/NZD is in the hands of the two central banks, with a bearish bias.
• The RB Z is expected to be less dovish than the RBA, favouring the Kiwi leg of the cross.

AUD/NZD is sat in the mid-point of the1.03 handle as traders get set for the ultimate showdown for the pair this week in the Reserve Bank of Australia meeting. Range trading continued overnight. It’s all eyes on the RBA at 4:30pm today.

The market expects no change but is closely watching guidance. As for the Reserve Bank of New Zealand, markets continue to believe there is a negligible chance of an OCR cut at the Monetary Policy Statement on 12 Feb, pricing it at only 10%.

"That said, they see an 80% chance of a final cut in this cycle – closely aligned with the RBNZ’s (and Westpac’s) own OCR forecast published at the previous MPS in November," analysts at Westpac argued.  

Coronavirus to be a major theme at the RBNZ and RBA

The NZ economic data (GDP, house prices, fiscal) argue for a shift from an easing bias to a neutral one, but the possible impact on the economy from the coronavirus means the RBNZ may retain guidance that the OCR could be reduced if necessary. Indeed, Chinese markets reopened after the New Year's holiday with a sharp downfall and the People's Bank of China cut interest rates on reverse repos and took other measures to stabilize markets.

What more can be expected as the death tolls and numbers of infected continue to rise? In the latest numbers, it was reported today that the death toll from a coronavirus outbreak in China rose to 425 as of the end of Monday, up by 64 from the previous day, the country's National Health Commission said on Tuesday. In the provincial capital of Wuhan, 48 people died. Across China, there were 3,235 new confirmed infections on Monday, bringing the total number so far to 20,438.

"Our early assessment of the potential impact of NZ’s ban on foreign nationals entering from China is a 0.4% drop in GDP over the next quarter. The 2yr swap rate has the potential to extend this decline to 1.00% - an area of congestion in September and October 2019. But much depends on how severe and persistent the coronavirus pandemic is," analysts at Westpac explained. 

RBA scenarios

Markets are expecting that there will be a reiteration of the dovish forward guidance while the cash rate is only 50bp from its effective lower bound. However, there are outside chances of a cut. The RBA may wish to speed up the gentle turning point in the economy, with fears surrounding the bushfires and spillover in Gross Domestic Product effects of Coronavirus’ impact on the Chinese economy.

If, however, there is an emphasis on the recent run of green shoots in economic data, a hawkish risk should see AUD rally to key buy stop liquidity through 0.6710 and towards the 0.68 handle in coming days and weeks, which too would help AUD/NZD back towards and through resistance structure on the 1.04 handle.

While there are expectation that the RBA will be on hold, should economic headwinds persist, coupled with the coronavirus spreading, the view remains that both the cash rate and the AUD will trend lower into 2020. AUD/USD could be forecasted to head towards a break below the 0.6600 handle in due course and as such AUD/NZD should follow suit in a playoff between the two central bank. 

AUD/USD levels

• Chart Of The Week: AUD/USD sold to critical support ahead of RBA

AUD/NZD levels

AUD/NZD remains sidelined within a short-term ascending channel into the meeting today. A break above its ceiling at 1.0375 would open the 50-DMA at 1.0414 before 1.0431, the peak of Jan 23. On the downside, there is risk to 1.0326 and then the Jan 27 low at 1.0308. Bears can then look for a break of the Aug 6 low at 1.0265.

AUD/NZD levels