Australian and New Zealand Dollar traders have, for the most part, shrugged off the COVID-19 clouds that dominated the press the past two weeks. Firm demand for risky assets is behind the move as investors continue to bet that the global economic recovery will not be derailed by this sudden surge in coronavirus infections.
A number of stronger-than-expected economic reports in the United States, Australia and New Zealand have encouraged investors to maintain the bullish tone that began months ago. Looking at the Aussie and Kiwi charts, one can see that investors bent a little, but did not break the uptrend.
The price action suggests the AUD/USD and NZD/USD will continue to claw higher as long as the economic data remains positive. The profit-taking or selling pressure is likely to start if the data starts to reverse. At this time, it appears that no one expects a second-wave of coronavirus infections to inflect the same amount of pain on the global economy as it did during the first wave.
Australian State’s Cases Spike, Borders to Shut
Although traders are banking on the recovery to continue, the AUD/USD could face some headwinds if COVID-19 continues to spread in the country.
Over the weekend, “The hard-hit Australian state of Victoria recorded two deaths and its highest-ever daily increase in coronavirus cases on Monday as authorities prepare to close its border with New South Wales,” the AP reported.
Victorian Premier Daniel Andrews announced that the state border with New South Wales will be closed from late Tuesday night in an agreement between the two state premiers and Prime Minister Scott Morrison. Morrison had previously opposed states closing their borders.
It will be the first time Australia’s two most populous states have closed their border since the pandemic began.
Last month, the Reserve Bank of Australia (RBA) kept rates on hold at its record low of 0.25 percent as Australia continues to battle with coronavirus’ impact on the economy. In our opinion, policymakers will leave rates unchanged in June and probably for the next three years.
Furthermore, previous comments indicate that the RBA sees no value in taking rates negative. Therefore, any further easing in monetary policy will have to come from quantitative easing.
Basically, investors shouldn’t expect to see a raise in the cash rate until the RBA has made progress towards full employment and inflation within the 2-3 percent target band.
As far as the AUD/USD and NZD/USD are concerned, the price action is disconnected from central bank activity. The rising currencies are being driven by global demand for higher-risk assets as investors continue to bet on a V-shaped recovery in the global economy.
The Aussie and Kiwi are not likely to pullback substantially unless a second-wave of COVID-19 forces enough massive shutdowns and restrictions to derail the current global recovery.
For a look at all of today’s economic events, check out our economic calendar.