The Australian and New Zealand Dollars rose sharply last week, helped by a drop in demand for the safe-haven U.S. Dollar, and aggressive stimulus responses from their respective governments and central banks.
On March 23, the U.S. Federal Reserve rolled out an extraordinary array of programs to backstop an economy reeling from sweeping restrictions on commerce that scientists say are needed to slow the coronavirus pandemic and ultimately keep more people safe.
For the first time, the Fed will back purchases of corporate bonds, backstop direct loans to companies and “soon” will roll out a program to get credit to small and medium-sized business. It also said it will expand its asset purchases by as much as needed to stabilize financial markets.
The series of actions marks a massive intervention by the U.S. central bank beyond the financial markets, where it so far concentrated its firepower, into the real U.S. economy.
The move by the Fed helped weaken the U.S. Dollar because it reduced demand for the greenback that had been driven recently by liquidity worries.
Later in the week, President Donald Trump signed an unprecedented $2.2 trillion economic rescue package into law after swift and near-unanimous action by Congress to support businesses, rush resources to overburdened health care providers and help struggling families during the deepening coronavirus epidemic. This move also has the potential to weaken the U.S. Dollar because it will flood the U.S. economy with cash.
Reserve Bank of Australia Goes Full Throttle with Liquidity
The RBA injected $6.9 billion into the financial system last week and said it would buy $4 billion in government bonds as it looked to blunt the economic fallout from the coronavirus pandemic.
The RBA has flooded the system with nearly $65 billion cash since March 12 when a liquidity crunch sent global markets into a tailspin. It has also purchased $9 billion in government bonds since launching its “unlimited” quantitative easing program on March 20.
Meanwhile, the RBA has so far been successful in flattening the yield curve as it aims to keep short-term yields around the cash rate of 0.25 percent.
Despite the aggressive moves by the central bank, the Australian economy is still expected to suffer recession for the first time in 30 years.
Reserve Bank of New Zealand Makes Sizable QE Move
Last Wednesday, the Reserve Bank of New Zealand (RBNZ) made its first foray into so-called quantitative easing with the purchase of NZ$250 million of government bonds in the secondary market. While the leap to QE was widely expected to help New Zealand’s economy through a looming recession, the enormity of the NZ$30 billion ($17 billion) program took many by surprise.
After making the move, RBNZ policymakers said it was necessary to respond to the economic crisis with a sizable bond-purchase program and it doesn’t believe the scale of its intervention will disrupt market functioning.
This article was originally posted on FX Empire
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