The Kiwi and the Aussie

The differing monetary policies adopted by Australia and New Zealand are diverging the values of their respective currencies, with the Australian Dollar surging against the close tied neighbour. Generally, the Australasian currencies trade similarly due to the geographical positioning and having similar economies, reliant on commodities exporting.

Monetary policy Differences

The key points of differentiation between Australia and New Zealand come from the recovery efforts through monetary policy from their central bank counter parts the Reserve Bank of Australia and the Reserve Bank of New Zealand. The RBNZ has already been quite aggressive with its quantitative easing through large scale bond buying programs and now they are strongly considering negative interest rates to further aid the economy. In contrast the RBA has adopted the use of yield-curve control mechanisms, only seen in use by Japan prior to Australia. The RBA’s Governor Philip Lowe has also noted in several statements that 0.15% was likely as low as the RBA would consider and that negative rates would remain extremely unlikely.

Forecasts

While the RBNZ has not indicated exact figures, and only that they have considered a negative rate, estimates are in the 30-50 basis point range, with expectations for cuts to occur by mid-2021. Forecasts for the AUDNZD are mostly for a rise before year end, with a target range between 1.13 and 1.19 for the 2021 period.

Technical

The technical are inclined to agree with the forecasts and the fundamentals, with the long running 5-year trend having been recently broken.

Covid-19

Adding to the monetary policy discussion, and technical differentiation, the impact of Covid-19 is ongoing. While the elimination strategy was successful early on for New Zealand, new cases and fresh lockdowns in Auckland have dampened the outlook moderately. Ultimately the elimination strategy is causing harm to the economy particularly in education and tourism sectors via tight border controls currently employed.

The Future

The difficulties to come for both Australia and New Zealand are likely to be ongoing for some time and the rhetoric from both respective central banks will need to be followed closely in the future. At some stage, the jawboning from the RBNZ and the RBA will stop, and the policies will likely diverge further than they already have.