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  • AUD/NZD is a play on the lower bound with respect to the RBNZ and RBA.
  • Unconventional monetary policy is a key focus for FX markets. 

AUD/NZD fell from 1.0445 to 1.0364 which was a one-month low overnight but it is volatile in early Asia on Tuesday and the price is firming on the upside. At the time of writing, AUD/NZD is trading between 1.0381 and 1.0407. Market sentiment over Covid-19 damage to global economies has been playing havoc on risk appetite and FX. Markets are seeking to draw conclusions from the various call to action from global authorities, and there is a focus back on the antipodeans with the Reserve Bank of New Zealand ext in the pipeline. 

Looking to the yields, the Australian 3-year government bond yields fell to 0.33%, a record low, before funding territory back to 0.42%. The 10-year yields moved to 0.53%, a record low before rebounding to 0.64%. They briefly beat the US yesterday which fuelled a bid in the Aussie. However, with the markets factoring in around 100% chance of a 25bp cut at the next RBA meeting on 7 April, there is some room to the downside vs the greenback being played out with test of the 0.66 handle again.

As for the kiwi, the market pricing for RBNZ implies 100% chance of a 50bp cut at the next meeting on the 25th March, with a terminal rate of 0.30%. The RBNZ will likely want to tread very cautiously from here, given the risk that credit availability is impaired when policy rates go super low or negative, and that is where the US dollar has seen some supply of late considering the Fed is seen to cut all the way to zero, hence short-covering in FX has weighed on the US dollar. 

Unconventional monetary policy tools in focus

The AUD/NZD cross will be governed by an interest rate playoff and how exposed each economy is to the virus. The Aussie tends to take the brunt of adverse sentiment surrounding China so it could be vulnerable to today’s Consumer Prive Index data, for example. However, markets are going to be pricing in RBA QE should the RBA cut to the lower bound next meeting around and that could be a catalyst for a sell-off if the risk that unconventional monetary policy for the RBNZ is lifting.

For the day ahead, we have the February NAB business survey is due at 11:30am Syd/8:30am Sing/HK which is expected by analysts at Westpac to reflect the hit to business confidence and conditions that has resulted from the virus. “January’s survey showed business conditions +3, confidence -1, versus a long term average around +6.” In New Zealand at 12pm Syd/9am Sing/HK, RBNZ Governor Orr will is speaking and will be addressing the subject of unconventional monetary policy tools.

AUD/NZD levels