AUD/USD and NZD/USD Fundamental Weekly Forecast – Demand for Risky Assets Sets the ToneThe major concern for AUD/USD and NZD/USD will likely be demand for risky assets given last week’s steep sell-off in the global equity markets.
The Australian and New Zealand Dollars finished lower last week despite hitting multi-month highs earlier in the week. Central bank comments, domestic data, a rebound in the U.S. Dollar and a drop in demand for risky assets helped pressure the two currencies.
RBA Holds Rates Steady
The Reserve Bank of Australia (RBA) kept the official cash rate at its record low 0.25 percent in its monthly board meeting. The RBA first cut interest rates to their record low in March, with government Philip Lowe saying the bank is unlikely to take rates any lower.
“Relatively speaking, the economic fallout of the coronavirus that is reverberating around global markets has not impacted Australia as hard as many other nations. Even considering Victoria’s second wave and the potential for subsequent outbreaks elsewhere, employment figures are encouraging and other key indicators point to our economy’s overall resilience,” Laing+Simmons’ managing director Leanne Pilkington said in the Finder RBA interest rate survey.
“Low, steady interest rates for the foreseeable future are appropriate to support the recovery.”
Australia is Officially in a Recession as GDP Falls 7 Percent in June
Australia’s economy is officially in a recession after June quarter data revealed the nation’s gross domestic product (GDP) has shrunk by 7 percent.
Data released by the Australian Bureau of Statistics (ABS) revealed that in the three months from April to June the nation’s GDP suffered its biggest drop since records began in 1959.
The previous quarter – which recorded activity across January to March – Australia’s GDP fell by 0.3 percent.
Treasurer Josh Frydenberg said today’s figures could have been far worse without financial assistance.
“Without the Morrison government’s economic support, 700,000 more jobs would have been lost and the unemployment rate would have been 5 percentage points higher,” Mr. Frydenberg said.
“In March, the Treasury was contemplating a collapse of GDP of more than 20 percent. The road ahead will be long. The road ahead will be long. The road ahead will be bumpy.”
New Zealand’s Central Bank Signals Openness to Looser Policy
New Zealand central bank Governor Adrian Orr signaled his intent to continue to loosen monetary policy as required, saying he’s determined to head off unnecessarily low inflation or even deflation.
While persistently low interest rates could lead to undue risk-taking and pose financial stability risks, Orr said these were outweighed by the damage that stagnant or falling prices could cause as the economy struggles to recover from the COVID-19 pandemic. The Reserve Bank is also motivated to limit the rise in unemployment as much as possible, he said in a speech Wednesday in Wellington.
“Consistently below target inflation has its own unique challenges that are best avoided,” Orr said. “We strongly believe that the best contribution we can make to our monetary and financial stability mandates is ensuring we head off unnecessarily low inflation or deflation, and high and persistent unemployment.”
The comments from RBA and RBNZ policymakers indicates that rates are going to continue to remain at or near historically low levels. However, the RBNZ is increasingly likely to cut its official cash rate into negative territory early next year and that it intends to keep borrowing costs low for a prolonged period to aid the economic recovery.
Even considering Victoria’s second wave of COVID-19 cases, the Aussie economy hasn’t been impacted as hard as other countries so we expect the RBA to continue to support the economy through bond purchases, but we don’t see negative rates coming.
The major concern for AUD/USD and NZD/USD this week will likely be demand for risky assets given last week’s steep sell-off in the global equity markets. Late last week, the U.S. Dollar rose to its highest in a week as investors bought into the safe-haven asset after the U.S. Labor Department reported job growth slowed further in August with financial assistance from the government virtually depleted, threatening the economy’s recovery from the COVID-19 pandemic.
For a look at all of today’s economic events, check out our economic calendar.