• Joel

AUD, NZD in Trouble As Central Banks Deliver Dovish Surprise

The antipodes (that is, AUD and NZD) are struggling.

Since last Thursday, AUDUSD has slumped some 200 pips from around the 0.7300 mark to present levels below the 0.7100 level. In doing so, the cross has broken out to the downside of a trendline that had been acting as resistance (from late June to late July) then support from early August to now, the second half of September.

Upon the break of this trendline, the door was opened (technically speaking) for a re-test of the early June high (also a low in late July) at 0.7060 and boy have we made progress to this level quickly!

Now we are below the 0.7100 level, a test of this crucial area of support seems near-inevitable.

NZD has not been doing much better; NZDUSD had been printing higher monthly highs followed by higher monthly lows pretty consistently over the last 3-4 months, the cross rallying from below 0.6400 in early June to just off 0.6800 this month.

The trend of higher lows each month unfortunately looks at risk of being snapped. NZDUSD slumped beyond the previous September low of just above 0.6600 today and is making solid progress towards the 0.6550 mark.

The next area of support of note is around 0.6500; if USD keeps picking up and AUD continues getting hurt, there is no reason why NZDUSD cannot test this level. Why are the two crosses struggling so much?

A burgeoning USD given growing global Covid-19 second wave concerns and on increasingly US political drama is one factor. But AUD and NZD have significantly also been underperforming their other G10 counterparts – the main reason for this is that both the Reserve Bank of Australia (RBA) and the Reserve Bank of New Zealand (RBNZ) have surprised the market with dovish vibes this week. Here is what has happened;

On Tuesday night, RBA Deputy Governor shocked markets by talking about how the RBA was looking at additional easing measures such as further interest rate cuts, including into negative territory, as well as the potential for the RBA to start buying bond of a longer maturity (i.e. 10 and 30 year Australian government bonds as well as the current 3 year government bond buying programme they currently have going) and even direct FX intervention.

Markets had been in the mindset that the RBA was set to remain on hold with policy for the foreseeable future, given that the Australian economy is still doing pretty well (despite the Victoria Covid-19 outbreak hiccup).

Given this new dovish commentary, a number of Australian banks are now calling for an RBA rate cut to 0.1% from 0.25% as early as October. This shift in tone from the RBA has caught AUD bulls off guard, and we are seeing the market adjust.

Not to be outdone by their Aussie counterparts, the RBNZ (who have been dead keen to come across as dovish over the past few months, even surprising markets with more QE back in July, all in a bid to weaken NZD) hit us with some dovish news at their rate decision last night;

The RBNZ stated that it’s Funding for Lending Programme (seen as a precursor of negative rates) will be ready before year-end (earlier than anticipated).

Should the bearish cocktail of dovish RBA and RBNZ vibes, mixed with risk appetite negative/USD positive developments in the pandemic and global economy continue, AUD and NZD might both be set for further downside!


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