AUD/NZD shoots higher on RBNZ QE expansion, prepared to cut rates further

AUD/NZD is currently trading at 1.0684 following a spike on the Reserve Bank of New Zealand interest rate decision and expansion of its QE programme to NZD$60B. 

The RBNZ, as expected, left rates on hold but have said that they are prepared to cut the cash rate further. However, the Committee reaffirmed its forward guidance that the OCR will remain at 0.25 percent until early 2021.

Key notes from the statement follow:

RBNZ statement highlights

The Committee reached a consensus to:

• expand the LSAP programme to purchase up to a maximum of $60b over the next 12 months;
• delegate to staff the composition and pace of purchases within the LSAP programme, across the eligible asset classes of NZ Government Bonds, NZ Government Inflation-Indexed Bonds, and Local Government Funding Agency bonds; and
• hold the OCR at 25 basis points.
• The Committee reaffirmed its forward guidance that the OCR will remain at 0.25 percent until early 2021.

COVID-19 flare-ups will highlight the challenge of emerging from lockdown

Meanwhile, AUD/USD rallied as far as 0.6536 in London but sentiment turned sour again as investors mulled the prospects of second waves of COVID-19. NAtions are opening up their economies and that puts their populations at risk of contagion. In recent trade, China is yet again reporting new cases and this time, there is a partial lockdown being implemented in Jilin City. This latest regional flare-up highlights the challenge of emerging from lockdown – serving as a template for the rest of the world – risk-off for markets. 

Earlier, New Zealand PM Jacinda Ardern explained that the nation is about to enter a very tough winter. She said that the budget 2020 will look to accelerate employment, empower businesses, and stimulate the economy. This is said on the week that NZ also seek to open up the economy. More on this here: New Zealand PM Ardern: Country about to enter a very tough winter.

A more positive outlook

On a brighter note, the Westpac-Melbourne Institute Index of Consumer Sentiment rebounded 16.4% to 88.1 in May from the extremely weak 75.6 read in April.

The analysts at Westpac argue that developments around the Coronavirus have been more positive. "While the number of confirmed cases globally has doubled since the April survey, the rate of growth has slowed markedly in both Europe and the US."

Meanwhile, the analysts at Westpac noted that Australia has seen particularly good outcomes pertaining to COVID-19 of late. The total number of confirmed cases is rising just 10% over the month, and showing signs of levelling out altogether. 

The resulting pressure on our health system is much milder than had been feared two months ago.