The Australian and New Zealand Dollars finished the year with a strong up trend. If you subscribe to the belief that a trend in motion is likely to remain in motion until acted upon by a strong force then you’ll be going into 2021 with a strong upside bias because the strongest force that could derail the rally in the Aussie and Kiwi is the U.S. Dollar itself and all forecasts point to it continuing to lose value due to burgeoning deficit spending.
In 2021, the Aussie and Kiwi are most likely to be supported by a number of factors but most hinge on control of the coronavirus. So far both Australia and New Zealand have done well in successfully controlling the spread of the killer virus by the use of good contact tracing methods to mitigate further outbreaks. Optimism in a full recovery of the economy will rise if there is a successful rollout of the vaccines.
Additional help in the form of government stimulus is also providing support. Meanwhile, the U.S. economy is expected to falter with it lagging behind the other majors. Additionally, political risks are expected to rise and the Fed is expected to keep printing money. All of which will be detrimental to the U.S. Dollar.
China’s economic growth is also expected to improve, raising demand for Australian commodities such as iron ore. This is one of the reasons why the Australian Dollar should outperform the New Zealand Dollar in 2021.
RBA Expects Recovery to Be Uneven and Drawn Out
At its recent policy meeting in December, the Reserve Bank of Australia (RBA) said it was not expecting to raise the cash rate for at least 3 years, but is prepared to do more if necessary. It also said it will keep the size of the bond purchase program under review.
The RBA also said addressing high unemployment is a national priority and that fiscal and monetary support would be required for some time.
As far as its forecasts are concerned, the RBA said positive news on the vaccine front should support recovery of the global economy, and that the Australian economic recovery is underway and recent data have generally been better than expected. However, the recovery is still expected to be uneven and drawn out and it remains dependent on significant policy support. The RBA also warned that a further rise in the unemployment rate is still expected.
RBNZ Unveiled New Lending Tool in Late 2020
At its last monetary policy meeting in mid-November, the Reserve Bank of New Zealand unveiled a new monetary policy tool that will reduce borrowing costs for lenders, while holding the benchmark rate at a record low and signaling its readiness to deploy negative rates.
As we head into 2021, New Zealand Dollar traders will be on the outlook for any clues on the RBNZ’s move to zero rates or a negative OCR, although stronger than expected data has given the RBNZ room to stick to its guidance of not lowering rates until March next near.
New Zealand’s success in containing the community spread of COVID-19 has allowed the economy to bounce back faster than most other countries, but with more job losses expected in coming quarters, inflation weak and the economy in recession, the RBNZ is expected to continue its monetary support.
The outlook for the Australian Dollar in 2021 is more positive than negative compared to the New Zealand Dollar. The big concern for both economies in 2021 will be the labor market.
As far as New Zealand is concerned, the outlook remains a little more uncertain. According to ANZ, “Closed borders mean a smaller economy and recessionary impacts of this are unavoidable.” Negative rates starting in March are still a possibility if the economy starts to take an unexpected turn.