AUD/USD and NZD/USD Fundamental Weekly Forecast – RBNZ Explicitly Outlines Exit, while RBA Remains Dovish

The New Zealand and Australian Dollars finished mixed against the U.S. Dollar last week with the Kiwi supported by hawkish comments from the Reserve Bank of New Zealand (RBNZ) and the Aussie pressured by expectations calling for the Reserve Bank of Australia (RBA) to reiterate its dovish tone this week.

Last week, the NZD/USD settled at .7248, up 0.0085 or +1.18% and the AUD/USD finished at .7708, down 0.0022 or -0.29%.

RBNZ Hints at End to Pandemic Era Monetary Policy

The Reserve Bank of New Zealand (RBNZ) held interest rates at current levels on May 26 but hinted at a hike as early as September next year, becoming one of the first advanced economies to signal a move away from the stimulatory settings adopted during the COVID-19 pandemic.

The RBNZ held rates at a record low 0.25%, but said it sees at least one 25 basis point hike by September 2022. It projected the official cash rate (OCR) would reach 1.5% by the end of 2023 and 1.78% by the end of 2024, underscoring expectations that recent positive data will lead policymakers to tighten rates sooner rather than later.

RBNZ Governor Adrian Orr emphasized that more patience was needed on policy and that OCR projections were “highly conditional” to the economy panning out as expected.

“We are talking about the second half of next year. Who knows where we will be by then,” he told a press conference following the decision. But traders paid little attention to this warning, sending the New Zealand Dollar soaring to its highest level since February 26 until end of the week/month profit-taking helped put a lid on the rally.

Weekly Outlook

Although the comments from the RBNZ were bullish per se, central bank policymakers are in no hurry to raise rates until inflation and employment targets are met. Furthermore, data still indicates that the domestic recovery was still uneven. Last week’s surge on the news may have been short-covering so NZD/USD prices could pull back into a support area that will allow real buyers to regroup and perhaps form a support base before moving higher.

The RBNZ’s hawkish stance contrasts with persistently dovish comments from the U.S. Federal Reserve and the neighboring RBA. Additionally, with last week’s hawkish comments, New Zealand joins Canada and Norway in explicitly outlining an exit from current crisis-mode central bank settings as a global vaccine rollout lifts the prospect of recovery in the world economy.

This week, AUD/USD will be focusing on another monetary policy decision by the RBA and economic output figures for the first quarter of 2021. The RBA is expected to reaffirm its guidance of a cash rate remaining at record lows “until 2024 at the earliest”, which will highlight the increasing wedge between the RBA’s stance and that of its global peers.

While Australia’s economy has recovered more rapidly than anyone expected, the latest week-long coronavirus lockdown of the state of Victoria would hit growth this quarter and provide a further reason for the RBA to stay dovish.