The Australian and New Zealand Dollars finished higher last week but most of the gains came early in the week as demand for higher-yielding currencies increased on speculation the coronavirus had peaked. The currencies were also underpinned by hawkish comments from the Reserve Bank of New Zealand (RBNZ).
The Aussie and Kiwi hit their highs for the week then retreated after China’s Hubei province, where the virus is believed to have originated, reported 242 new deaths, double the previous day’s toll and the fastest rise since the pathogen was identified in December.
The week ended with investors scratching their heads as to whether to play the long side in anticipation of a faster-than-expected end to the coronavirus outbreak, or to play the short-side on expectations that economic weakness in China will spread to Australia and New Zealand.
Reserve Bank of New Zealand Holds Rates Steady, Drops Chance of Rate Cut This Year
The RBNZ held its benchmark interest rate at a record low, but signaled it’s ready to act if the impact of the coronavirus threatens the economy.
The RBNZ’s official cash rate (OCR) was kept steady, as expected, at 1.0 percent. Additionally, Reserve Bank governor Adrian Orr said economic growth looks to be improving after last year’s slowdown.
“Economic growth is expected to accelerate over the second half of 2020, driven by monetary and fiscal stimulus, and the high terms of trade,” he said.
The OCR was cut twice last year from 1.75 percent to its current level, but the central bank signaled it then expected to be on hold for a considerable period.
RBA’s Governor Lowe Sees Australian Economy Improving
Nearly two weeks ago, Reserve Bank of Australia (RBA) Governor Lowe said the recent uptick in inflation and employment made policymakers confident that the economy is doing well enough not to warrant further easing.
Last week, Lowe said the outlook for the Australian economy is improving, Chinese policy stimulus will be a positive for Australia, low interest rates are working, but it’s going to take time and he is not obsessed with getting inflation back to target in a hurry.
The week will feature the RBA Monetary Policy Meeting Minutes and the Federal Open Market Committee (FOMC) Meeting Minutes. In my opinion, the focus for traders will be on how seriously policymakers discussed the potential economic impact of the corona virus on their respective economies.
After its last monetary policy meeting in early February, RBA Governor Lowe urged calm when assessing the likely economic impact of the coronavirus. “It is important that we don’t catastrophise here,” he said.
He also said that setbacks from the Australian bushfires and coronavirus were likely to be merely temporary, with a boost in the second half of 2020 from spending on rebuilding after the fires.
The RBNZ shared the same view as the RBA.
The coronavirus was seen as an emerging downside risk, which would affect the economy.
“We assume the overall economic impact of the coronavirus outbreak in New Zealand will be of a short duration, with most of the impacts in the first half of 2020,” Orr said.
“Nevertheless, some sectors are being significantly affected. There is a risk that the impact will be larger and more persistent.
“Monetary policy has time to adjust if needed as more information becomes available.”
This article was originally posted on FX Empire
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