AUD/USD and NZD/USD Fundamental Daily Forecast – Kiwi Buyers Remain Unfazed by RBNZ Threat of Negative Rates

Demand for higher-yielding commodity-linked currencies continues to drive the Australian and New Zealand Dollars higher on Friday with investors showing almost no concern about buying ahead of Friday’s U.S. Non-Farm Payrolls report. This is because a bad report has already been priced into the markets. Better-than-expected data has not so there is little risk being long going into this report.

At 08:33 GMT, the AUD/USD is trading .6988, up 0.0045 or +0.65% and the NZD/USD is at .6506, up 0.0043 or +0.67%.

Money from the unwinding of bets on safe-haven currencies continues to reflect broad optimism in financial markets as easing social distancing restrictions continue to support economic recovery hopes.

U.S. Economic Data

On Thursday, the U.S. weekly jobless claims report showed the number of Americans filing for benefits dropped below 2 million last week for the first time since mid-March, even though that is still three times larger than their peak during the global financial crisis.

Official U.S. employment data due later on Friday is expected to show nonfarm payrolls fell by 8 million in May after a record 20.537 million plunge in April. The unemployment rate is forecast to rocket to 19.8%, a post-World War Two record, from 14.7% in April.

As New Zealand Prepares for Negative Rates, Kiwi Acquires Yen’s Stripes

New Zealand once boasted one of the world’s highest-yielding currencies, making it a favorite for investors chasing income – now, growing prospects of negative interest rates at home have lumped the kiwi with Japan’s safe and boring Yen, Reuters wrote.

The Reserve Bank of New Zealand’s policy rates have already plunged from 8.25% before the 2008 financial crisis to a mere 0.25% now.

The central bank seems set to take them negative, to lower borrowing costs for banks and businesses and stimulate an economy reeling from the coronavirus.

That spells a sharp turnaround for the kiwi and the investment-grade New Zealand bond market, both of which have been classic “carry” trades, where investors borrow in low-yielding currencies such as the Yen or the Euro for riskier yet higher-yielding assets.

If the RBNZ does adopt negative rates, New Zealand would join Japan, Sweden, Denmark and other European countries that have done the same, removing a lucrative market for yield-hungry investors.

Daily Outlook

So the New Zealand Dollar is now a carry-trade currency, and all this time I was led to believe their economy was stronger than the U.S. economy (wink wink).

Enjoy the rally while you can because once the RBNZ begins to cut interest rates deep into negative territory in 2020, the outcome is likely to severely dent the New Zealand Dollar’s appreciation potential.

For a look at all of today’s economic events, check out our economic calendar.