AUD/USD and NZD/USD Fundamental Daily Forecast – New RBNZ Lending Program Pares Chances of Negative Rates

The New Zealand and Australian Dollars are trading higher on Wednesday, helped by increased demand for higher-yielding currencies and less-dovish comments from the head of the Reserve Bank of New Zealand.

Both currencies are firming as optimism about a potential coronavirus vaccine was offset the previous session by worries about how the drug will be delivered and by a surge of new infections in the United States.

At 09:30 GMT, the NZD/USD is trading .6893, up 0.0062 or +0.91% and the AUD/USD is at .7300, up 0.0014 or +0.20%.

The New Zealand Dollar recovered from an early dip to reach its highest level in a year and a half as traders scaled back bets that the central bank would move to negative interest rates.

Reserve Bank of New Zealand Holds Rates Unchanged

The RBNZ kept interest rates on hold at 0.25% and introduced a new monetary policy tool to encourage more loans by reducing borrowing costs for banks, which matched market expectations. Policymakers also re-iterated rates would stay there until March 2021.

RBNZ Policymakers Introduce New Funding Program

On Wednesday, RBNZ policymakers introduced a new funding program that would reduce costs for lenders. The new funding-for-lending program (FLP) for banks led market participants to pare chances of negative rates.

Government bonds sold off, too, with five-year yields up 10 basis points at 0.3% from Tuesday. The bank also retrained its large scale asset purchase (LSAP) programme at NZ$100 billion ($66.32 billion).

RBNZ Governor Orr Likes New Lending Scheme

In a news conference, Governor Adrian Orr said the lending scheme to be launched in December would likely have a greater impact on rates than cutting the OCR to 0.1. The size of the program is estimated to be about NZ$28 billion ($19.31 billion) based on take up, and Orr said reducing banks’ funding costs would encourage them to offer cheaper loans.

Orr also said it was “too early to tell” if the possibility of negative rates had now decreased. Orr also left the door ajar for further stimulus given the unemployment rate was expected to rise from 5.3% now and inflation was projected to undershoot the RBNZ’s targeted range.

“The Committee agreed that monetary policy will need to remain stimulatory for a long time to meet the consumer price inflation and employment remit, and that it must remain prepared to provide additional support if necessary,” the RBNZ said in a post-meeting statement.

The RBNZ also said earlier on Wednesday that it would consult next month on whether to reintroduce limits on the amount of “high-risk lending” banks can make, amid growing concerns of a housing bubble.

Daily Forecast

Risk-linked currencies like the Kiwi and Aussie may continue to gain against the U.S. Dollar if the financial community stays in a risk-on mode. The New Zealand Dollar could continue to outperform the Australian Dollar due to the lowering of the negative-rate chance.

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