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New Zealand Dollar May Fall as Australian Dollar and AUD/NZD Rise

New Zealand Dollar May Fall as Australian Dollar and AUD/NZD Rise

Daniel Dubrovsky, Strategist

New Zealand Dollar, Australian Dollar, AUD/NZD, Coronavirus - Talking Points

  • “Risk-neutral” AUD/NZD has been maintaining composure on virus
  • New Zealand Dollar may depreciate on a dovish shift in RBNZ’s tone
  • AUD/NZD may aim for another test of key resistance, eyeing breakout?

New Zealand Dollar May Fall Versus the Australian Dollar on a More-Dovish RBNZ

Despite the aggressive slump in the S&P 500, AUD/NZD has managed to maintain composure thanks to its unusual “risk-neutral” trait. Ever since the Reserve Bank of New Zealand left rates unchanged in November and quelled further easing expectations, the Australian Dollar depreciated against the Kiwi Dollar. The pair tends to closely follow spreads in respective government bond yields – see chart below.

The tides may change in the near term with the outbreak of the coronavirus, which potentially leaves some catching up to do for the New Zealand Dollar given recent neutral commentary from Governor Adrian Orr. Earlier this month, the RBNZ anticipated leaving its benchmark lending rate unchanged in 2020 which caught investors off guard and resulted in aggressive gains in NZD. That proved short-lived however.

The first coronavirus case was just reported in New Zealand, though officials highlighted that the patient is in isolation with chances of an outbreak slim. Still, the risk to global growth is on the rise with China’s economy anticipated to slow with growth already near 30-year lows. China is New Zealand’s largest trading partner and knock-on effects risks deteriorating the local economic outlook.

With that in mind, AUD/NZD may continue looking past wobbly stock markets and focus on prospects of a material shift in guidance from the RBNZ. Overnight index swaps are now almost fully baking in one rate cut from the central bank in May with odds of a second by November at almost 80%. The downside risk for AUD/NZD is that these are overblown and that RBA beats the RBNZ to it at next week’s rate decision with its own dovish shift in tone.

AUD/NZD “Risk-Neutral”

New Zealand Dollar May Fall as Australian Dollar and AUD/NZD Rise

Chart Created Using TradingView

AUD/NZD – Technical Analysis

From a technical standpoint, AUD/NZD remains in consolidation mode since December. The ceiling appears to be at 1.0506 with the floor at 1.0308. Focusing on February price action, the pair may be on the verge of pushing above a descending channel of resistance. That may pave the way for another test of the ceiling in its consolidation range. A breakout above the latter may shift the technical outlook bullish as the pair aims for bottoms it found in September and October at 1.0633 and 1.0666 respectively.

AUD/NZD Daily Chart

New Zealand Dollar May Fall as Australian Dollar and AUD/NZD Rise

Chart Created Using TradingView

--- Written by Daniel Dubrovsky, Currency Analyst for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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