AUD/USD and NZD/USD Fundamental Weekly Forecast – Tracking Risk Sentiment

The Australian and New Zealand Dollars finished higher last week against the U.S. Dollar after the U.S. Federal Reserve unveiled another massive lending program designed for small companies and amid rising demand for risky assets due to a slowdown in coronavirus infections, which reduced demand for the safe-haven U.S. Dollar.

Last week, the AUD/USD settled at .6354, up 0.0359 or +5.99% and the NZD/USD closed at .6094, up 0.0235 or +4.01%.

It’s not an improving Australian and New Zealand economy that is driving the price action, it’s that investors aren’t a bearish as they were weeks ago because they see conditions improving in China while Australia and New Zealand move closer to their new coronavirus cases peak, and while the U.S. is still far from peaking.

Furthermore, positive developments over the virus pandemic reduces the need for the highly liquid U.S. Dollar. Meanwhile, the aggressive monetary stimulus moves by the Fed has led to a large increase in the supply of U.S. Dollars.

The Fed’s Bearish Moves

Over the last 6 weeks, the Fed has slashed interest rates to zero, restarted quantitative easing, and increased dollar liquidity to combat a shortage in money markets, leaving the dollar in the grip of bears in the spot market.

Last Thursday, the Fed announced a $2.3 trillion program to offer loans to local governments and small and mid-sized businesses, the latest step to backstop the U.S. economy as the country battles the coronavirus crisis.

Australia Responds

The Reserve Bank of Australia cut rates in two steps (25 bps on March 3, 25 bps on March 19), taking the cash rate to 0.25%; introduced the first use of quantitative easing, setting a target of around 0.25% for bond yields.

Additionally, it implemented a A$90 billion ($56 billion) funding facility to banks at fixed rate of 0.25%; A$15 billion purchase program of residential mortgage-backed and other asset-backed securities; A$715 million support program for airlines.

Meanwhile, the government responded with A$66.1 billion in assistance for companies and additional welfare payments; A$17.6 billion in subsidies for apprentices, small businesses, pensioners and others; A$130 billion to subsidize wages of an estimated 6 million people.

New Zealand Provides Stimulus

New Zealand announced one of the largest per capita stimulus packages in the world, amounting to 4% of its GDP, in an attempt to soften the negative economic impact from the coronavirus outbreak.

The NZ$12 billion ($7.3 billion) package was larger than that implemented during the global financial crisis, and bigger as a proportion of GDP than those announced by countries like Australia and Singapore, authorities said.

Weekly Outlook

The AUD/USD and NZD/USD should be supported over the short-run by demand for risky assets, but over the long-run by the flood of U.S. Dollars hitting the economy.

If demand for risky assets plunges again then look for the move to take the Aussie and Kiwi with it. This is because the financial crisis playbook says sell all risky investments from stocks to currencies when there is weakness and buy the safe-haven U.S. Dollar.

So basically, the short-term direction of the Aussie and Kiwi will be determined by risk sentiment.