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NZDUSD slides as RBNZ considers every tool in the kit

Sean MacLean
Research Strategist
May 13, 2020
The New Zealand dollar fell from above 61 US cents to almost 60 this afternoon as the Reserve Bank of New Zealand (RNBZ) announced an expansion to its asset-purchasing program and that it was preparing financial institutions for a negative cash rate.

The dovish stance comes as the RBNZ leaves all policy options on the table to combat the global economic standstill that could push the local unemployment rate above 10%.

Daily chart: NZDUSD falls back to 0.60 support after holding above the level since late April.

NZDUSD quickly fell towards support at 0.6000 on the RBNZ announcement. The kiwi will be resistant to move below 60 US cents but is an increasingly dovish central bank enough to tip the NZD below 0.6000? Watch for a daily close below 0.6000 for conviction of a move lower.

The reserve bank expanded its large scale asset-purchasing program from a $33b limit to a potential $60b. Its holdings of government bonds will be limited to 50% of those in circulation to ensure liquidity and a functioning bond market. RBNZ Governor Adrian Orr said the central bank is a long way from considering purchasing bonds in the primary market, however left the door open to that option, mentioning it would be considered if the secondary market were to dysfunction.

Orr has previously indicated he thinks New Zealand can push rates deeper into negatives than other countries, considering relatively higher retail interest rates despite a historically low cash rate. He said the limit to negative rates would be where banks could maintain retail deposits above zero.

AUDNZD: It’s all about central bank divergence

While the RBNZ leaves negative rates on the table and expands its asset-purchasing program, the Reserve Bank of Australia (RBA) has ruled out negative rates and is tapering its own bond-buying program.

Weekly chart: AUDNZD powers to fresh 2020 highs, continuing a steep recovery since brief parity in March. The cross is approaching 1.080075, a resistance level from September-November 2019. Chart source data: Metaquotes MT5

NZD weakness today has pushed AUDNZD to a level not seen since November, as the AUD continues to outperform its kiwi counterpart. AUDNZD looks ready to have a run just above 1.0800 here, where it could meet September-November weekly resistance.

After reaching parity at the height of the March sell-off, AUDNZD has quickly pushed higher one expectations that Australia will stage a stronger recovery than its kiwi neighbour. Australia is a major raw material exporter, whereas New Zealand’s mostly an agricultural exporter, particularly at the premium end. Demand for Australia’s exports is likely to pick up faster than New Zealand’s.

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