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. There main concerns were another round of lockdowns and restrictions that could slow down the economic recovery.
Australian Economic News
At the start of the week, Reserve Bank of Australia (RBA) Governor Philip Lowe said the Australian Dollar is up off recent lows because of how well the nation handled coronavirus so far, but warns that will change if there is no major economic reform.
Lowe said a recent rise in the local currency from COVID-19 lows around 55 US cents to 68.5, including a recent brief stay above 70, was a reflection of the nation’s pandemic outperformance.
“I would like a lower currency in terms of macroeconomic outcomes – it would help reduce unemployment and lift inflation closer to target – but, at the moment, I think it’s really hard to argue that the Australian Dollar is overvalued,” he said.
“We need to remember that exchange rates are relative prices, and health outcomes in Australia have been relatively good, and the economic outcomes so far have been relatively good, and I think the future is relatively good compared to many other countries as well, and commodity prices have held up.”
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 the course of 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.
For a look at all of today’s economic events, check out our economic calendar.
This article was originally posted on FX Empire
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