AUD/USD and NZD/USD Fundamental Weekly Forecast – COVID Headwinds May Force RBA to Curtail Tapering Plans
The Australian and New Zealand Dollar finished slightly lower last week after gains from a promising mid-week rally were erased by domestic economic concerns, central bank decisions and a drop in risk sentiment.
This week, the catalysts beyond the price action are spread evenly between the Reserve Bank of Australia’s (RBA) monetary policy decisions and a pair of New Zealand employment reports. The wildcard is risk sentiment. That’s being influenced by a number of factors including China’s crackdown on technology companies, a potentially overvalued U.S. stock market and the rapidly spreading COVID-19 variant.
Will the RBA Walk Back Last Month’s Taper Announcement?
The RBA will release its latest monetary policy rate statement and interest rate decisions at 04:30 GMT on Tuesday. Due to the resurgence of the coronavirus, which has led to lockdowns and restrictions, while raising concerns over a potential contraction during the third quarter, some investors feel that central bank policymakers may be forced to walk back their plan to begin tapering its bond purchases announced on July 6.
Lowe is expected to put off until later in the year plans to scale back weekly bond purchases, while keeping the cash rate at 0.1% on Tuesday. That’s the view of a large majority of 18 economists surveyed by Bloomberg last week. Two of them went a step further and flagged the risk of the bank also extending its three-year yield target to the November 2024 bond.
Up until the latest outbreak, Australia’s economy had been on track to achieve the RBA’s goal of unemployment around 4%, the level RBA Governor Philip Lowe hoped would spur faster wage growth, and stable inflation in the RBA’s 2-3% target range.
However, with the resurgence of COVID-19 infections, the likelihood of another contraction is strengthening. This is also leading some economists to issue dire forecasts.
“Commonwealth Bank of Australia and Westpac Banking Corp., the nation’s top lenders, expect 200,000-300,000 jobs to be lost and unemployment to climb as high as 5.7% from the current 4.9% due to the outbreak. Both expect much of those losses to be recouped once the outbreak is contained and as vaccinations ramp up,” Bloomberg reported.