NZD/AUD – Battle Of The Interest Rates

17. Feb. 2021

NZD/AUD is approaching a robust congested area at around 0.925. A downwards channel sees a possible move further lower may see the pair come a level below 0.9. However, an action lower will be dictated on which economy puts the brakes on monetary stimulus first.

Monetary policy dictated by the state of the economy

During the peak of the Coronavirus, the best method of suppressing the virus was not evident. This is where Australia and New Zealand's strategies diverged.

Australia went for a loose lockdown, allowing citizens to roam freely without restricting them to their houses. They did enforce social distancing laws alongside mask-wearing.

New Zealand went for a strict lockdown, only allowing citizens to leave their house to exercise, get groceries and go to the doctors. Essential workers were given a pass to go to work.

It became evident as to what method was more successful. There were critics initially questioning New Zealand's method, pointing to the likes of Australia and Japan, who were getting similar results to New Zealand per capita, however, without the devastating economic cost of a lockdown. Those critics were soon to be silenced after New Zealand slowly pulled out their nearly six-week lockdown, well on their way to recovery. On the other hand, Australia had a devastating second wave that forced the inevitable – a strict lockdown. However, by then, New Zealand was back open and running.

With a head start in Australia's economic recovery, New Zealand has been showing signs of slowing its fiscal and monetary policy measures. Recently, The Reserve Bank of New Zealand (RBNZ) re-instated policies regarding mortgages issued by banks, which require house investors to front up 40% of the house sale price if they want to purchase a house. These were temporarily removed during the peak of the Coronavirus in 2020 to stimulate the economy. However, they were placed back after the national median price jumped up to $730,000, up 19.3%.

However, a country that is heavily dependant on tourism is struggling due to the strict border controls. Westpac analysts predict New Zealand's GDP to fall 0.7 over the six months to March due to the lack of tourists. Dominick Stephens stated that "tourism is highly seasonal, and there is normally a strong net inflow of people into the country in the summer months. The absence of visitors was felt keenly in the December quarter, and will be even more so in the March quarter, which would have otherwise been the peak tourist season."

Australia closing on New Zealand's lead

Australia has not had a good time dealing with the Coronavirus. Outsourcing security of their quarantine to a private company did not end well, with the spread of the virus being exacerbated by the security guards sleeping with the Coronavirus guests. This, alongside lax state line restrictions, pushed Coronavirus cases up, forcing two lockdowns. However, there is some optimism in the Australian economy, with many of their commodities' prices reaching all-time highs. Furthermore, the Reserve Bank of Australia stating that the "recovery in the second half of 2020 had been faster than initially expected."

I believe the economy that starts tapering monetary policy programs will first see their currency strengthen against the other. With the RBA stating that they are "committed to doing what it reasonably could to support the Australian economy" and that "significant monetary support would be required for some time," it looks like New Zealand in the mid to long term will be raising rates before Australia will, given the actions they took with loan-to-value ratios, alongside the consistent recovery from the Coronavirus.