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AUDNZD - can the flightless bird soar?

Sean MacLean
Sean MacLean
Research Strategist
Feb 13, 2020
The Reserve Bank of New Zealand (RBNZ) removed its easing bias on Wednesday despite a potential economic fallout from the novel coronavirus CoVID-19. Borders remain closed to visitors from China, a blow to New Zealand’s largest export tourism. The cash rate was held at a record low 1.0%.
NZDUSD daily chart

NZDUSD jumped 53 pips to 0.6461 on the news and drifted higher to close the day at 0.6465 after the RBNZ removed its easing bias.

The RBNZ is known for being proactive and getting ahead of the curve. Take last year’s unexpected 50 basis point (bp) rate cut as an example, when the bank caught markets off guard and pledged to do “whatever it takes” to meet its mandate of price stability and maximum sustainable employment.

This puts the RBNZ at odds with its Aussie counterpart the Reserve Bank of Australia (RBA), which tends to be slower to react. The RBA has left all options open as it waits to understand the economic impact of the summer bushfires and CoVID-19.

Data divergence

The neighbouring banks share a dual mandate to manage price stability and unemployment. There’s a discrepancy in this key data too.

AUDNZD

The AUDNZD forex pair has been in a downtrend since early November. Divergence in economic data could see this push lower.

Unemployment remains high in Australia at 5.1%, and despite three rate cuts in 2019 the RBA is struggling to get on top of this. It’s a different story over the ditch. New Zealand’s unemployment rate is a low 4%, near maximum sustainable employment.

The central banks have a similar inflation target of one to three percent, and are seeing modest progress towards the target.

The RBA is watching jobs data closely, and has indicated an increase in the unemployment rate will be the major catalyst for a future rate cut. No meaningful progress towards the inflation target as well as bushfire and virus fallout also present downside risk.

The banks each acknowledge that rates are very low and further easing will inflate asset prices and encourage households to take on more debt, which is already at record levels. Any future cut must be carefully considered.

So where to for AUDNZD?

There’s little Australian data coming up during the rest of February. The only meaningful print is unemployment data on 20 February 11:30 AEDT. Knowing the RBA are watching this closely, a bad print here and calls for easing will increase again.

The calendar is slightly more full in New Zealand. Manufacturing, housing, and food price data Friday might not move markets but will help understand the bigger picture. The January trade balance print on 27 February won’t yet reflect the impact from the China travel ban on tourism. And let’s consider how significant that could be: Tourism is New Zealand’s biggest export and Chinese tourists are the second biggest spenders. The impact of the ban during peak tourist season won’t be understood until late March.

There are no cases of CoVID-19 in New Zealand yet, and the RBNZ expects the economy to recover from any fallout by mid-2020. On the other hand, Australia has 15 confirmed cases of the virus and remains relatively more exposed than NZ.

Of course, AUD reached an 11-year low against the USD last week and has bounced off slightly since. Weighing everything up, it just seems there’s more downside risk for the Aussie.

AUDNZD chart

On the AUDNZD daily chart, there’s long term support just above the 1.0300 handle at 1.0308, and a more recent resistance ceiling at 1.0490. Price action rejected resistance on Wednesday. There’s no real reason for the pair to trade above resistance at the moment.

Looking at long-term support, AUDNZD will need a really good reason to move below this level. We’re at a crucial point though, if the RBA can’t keep a lid on Aussie unemployment and is forced to cut rates while their neighbour doesn’t, resistance could well give way. With little Australian data on the horizon, the AUD will continue to be hit by any CoVID-19 headlines.

The kiwi has never had an equal footing with its Australian counterpart, and nor should it with its much smaller economy. For a flightless bird, how far can it soar?

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