The
Australian and New Zealand Dollars edged higher last week in a mostly
lackluster trade as bullish and bearish traders clashed over conflicting
fundamentals. The bulls were driven by demand for higher risk assets as
investors continued to bet on a speedy economic recovery.
The
bears were spooked by renewed worries over the spread of the coronavirus as the
United States and several other countries reported spikes in the number of
infections. Their main concerns were another round of lockdowns and
restrictions that could slow down the economic recovery.
New Zealand Economic News:
Last
week, the Reserve Bank of New Zealand (RBNZ) kept its official cash rate on
hold at 0.25%, in line with market expectations, but said the stronger New
Zealand Dollar had put pressure on export earnings.
The
central bank, in an emergency response to the COVID-19 pandemic, cut its rate
by three-quarters of a percentage point to 0.25 percent on March 16 – its
lowest ever level.
Economists
expect the rate to stay there for at least this year.
The
bank said it expects the decline in annual GDP this year to be the largest in
at least 160 years, yet the New Zealand Dollar, after slumping to US57c on
March 20, has rallied strongly, trading today at US65c.
In
its statement, the bank said the stronger New Zealand Dollar had “put further
pressure on export earnings”.
This
week, the direction of the AUD/USD and NZD/USD is likely to be determined by
investor sentiment and safe-haven demand for the U.S. Dollar. With COVID-19
cases rising globally, countries could begin to re-implement strict lockdowns
and restrictions. This should slow down the pace of the global economic
recovery, taking down stock prices with it.
Lower
demand for risky assets should send investors into the safety of the U.S.
Dollar, which would put a lid on the Aussie and Kiwi, or even drive them lower.
Given
last week’s comments by the RBA’s Philip Lowe and the RBNZ statement, the
Aussie and Kiwi are likely overpriced. Combine this with the resurgence in
COVID-19 infections and I believe we have a “sell the rally” situation.
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