Recession is getting worse; Overview of AUD and NZD

Fears that a too early exit from restrictive measures could trigger a new coronavirus outbreak led to renewed demand for protective assets, and US stock indexes closed in the red zone. Several factors contributed to the growing fears - U.S. health official Fauchi addressed the Senate Health Committee, Republican Senator Graham introduced a bill on sanctions against China, and three representatives of the Fed (Bullard, Kashkari and Harker) aggressively promoted the idea of negative rates.

The head of the Federal Reserve, Powell, is expected to speak this evening. If he also touches on the topic of negative rates, the markets will assume that a clear signal has been received, and the panic mood may noticeably increase.

Consumer prices in April fell by 0.8% in the US, which was in line with expectations, year-on-year inflation slowed to 0.3%, so the idea of negative rates gets additional reasons.

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The dollar looks neutral on Wednesday morning, demand for defensive assets, primarily for the yen, is expected to increase, commodity currencies will be under pressure, but it is still unlikely to go beyond the established trading ranges due to the lack of a clear strong impulse.

NZD/USD

According to the results of the meeting on monetary policy ended on Wednesday, the RBNZ left the rate at 0.25% without risking to go into the negative area, but at the same time significantly expanded the asset purchase program to $ 60 billion per month, compared with the previous limit of 33 billion. The rationale for such a decisive step is the decline in economic growth among the main trading partners of New Zealand, which will inevitably lead to a reduction in exports.

At the meeting, The RBNZ discussed three main scenarios for the further development of the situation, and even the most optimistic of them suggests an unprecedented decline in economic activity and employment. Kiwi expectedly responded by a fall.

The estimated fair price goes further down and pulls the spot price. According to the CFTC report, the net short position is increasing, that is, speculators see the main scenario as a threat of further weakening of the New Zealand dollar.

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The Minister of Finance of New Zealand made a wide report last week, who also confirmed that the government will experience a budget deficit for a long time and net debt will grow. Tomorrow, the Treasury will publish a preliminary estimate of the budget for next year. It may turn out to be very negative for NZD, in any case, banks actively operating in New Zealand (in particular ANZ and NAB) do not expect anything good from the publication and draw rather gloomy prospects.

Thus, the kiwi remains under pressure. An attempt should be expected to decline to support 0.5990/95 and further to 0.5910/20, where the medium-term prospects of the kiwi will be decided.

AUD/USD

NAB Bank has published an extensive study of the state of the Australian economy, which sees the first signs of a slowdown in the economic downward turn, and predicts a decline in GDP in the 2nd quarter. by 8.4%, and unemployment growth to 11.7%. Both indicators are not worse than those in the United States, the budget looks more balanced, that is, internal reasons for the sharp decline in AUD/USD are insignificant.

The Australian currency feels somewhat better than its counterparts in a number of commodity currencies, primarily because of the greater stability of the main trading partner - China, when compared with the economic prospects of the United States and Europe. This confidence received material confirmation – according to the CFTC report, speculators reduced the short position on the AUD on CME by 0.3 billion, while on the contrary, sales on kiwi, pound and Canadian dollar increased.

As a result, the estimated fair price has stopped declining, and the prospect for AUD/USD has stopped looking negative.

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The most likely scenario for the AUD in the coming days is trading in the range. An attempt to test the resistance zone of 0.6550 / 60 is possible if the bill against China does not receive support in the Senate, and the demand for risk returns to the markets. Meanwhile, exiting below the support zone of 0.6370/75 is only possible if a strong negative impulse appears.

The material has been provided by InstaForex Company - www.instaforex.com