The New Zealand dollar strengthened over 2% against the Australian dollar in September but failed to escape the wave of US dollar strength that developed, as weak risk appetite continued to dominate FX markets.
The RBNZ kept is policy settings unchanged last week, including the NZ$100bn Large Scale Asset Purchase (LSAP) programme, the 0.25% key interest rate and a flat interest rate path until at least March 2021. In the minutes, the central bank struck a dovish tone, however, saying that “progress is being made on the Bank’s ability to deploy additional monetary instruments” and that it is “prepared to provide additional stimulus” in the form of negative rates and foreign asset purchases. The MPC also agreed to launch a Funding for Lending Program (FLP) before the end of 2020, which should deliver a boost to credit availability and further reduce borrowing rates.
The recent economic data included a smaller-than-expected contraction in New Zealand’s economy of 12.2% compared to the forecasted median of 12.5% quarter-on-quarter.
For perspective, Australian GDP fell by 7.0% QoQ compared to the surveyed median of -6.0%. The rise in housing prices were also discussed in the minutes, following a discrepancy between the Reserve Bank’s baseline scenario which had assumed a decline, and the July figure of 7.5% year-on-year. The Bank stated the recovery in the housing sector may indicate a stronger recovery in consumer spending as and residential construction if sustained, but some members noted that the rising unemployment is expected to further weigh on house price developments.
A strong New Zealand dollar may be of concern for the central bank, as this makes exports more expensive.
The New Zealand dollar is up over 1.6% against the Australian dollar since the beginning of this month, but has seen a 4% drop against the US dollar following weakened risk appetite. Today, the Kiwi dollar started the week on a stronger footing against the US dollar as risk flows out of the safe havens hurt the US dollar on Monday in the absence of significant macroeconomic data releases. However, with the general trend in the global case count remaining a major concern and global economic data reflecting an uncertain outlook, risk aversion is likely to remain a major theme.
For the Kiwi dollar, this translates to more downside risks in the short term.
Hopes of a US fiscal stimulus plan and further developments in fresh coronavirus restrictions will be key in determining this week’s market mood and in turn investors’ interest in the Kiwi dollar.
NZD strengthening over 2% vs AUD in September but can’t escape USD strength
Author: Ima Sammani, FX Market Analyst