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AUD/USD and NZD/USD Fundamental Daily Forecast – Aussie Weakens as RBA Considers Various Policy Options

James Hyerczyk
·3 mins read

The Australian and New Zealand Dollar’s tumbled against the U.S. Dollar on Tuesday as investors sought safety for the second day in a row in the greenback while they eyed new restrictions aimed at curbing surging coronavirus cases in Europe, the latest U.S. – China tensions and Washington’s lack of progress on reaching a fiscal stimulus agreement.

On Tuesday, the AUD/USD settled at .7169, down 0.0055 or -0.77% and the NZD/USD finished at .6634, down 0.0035 or -0.52%.

The Australian Dollar fell to its lowest point against the greenback in almost a month after the Reserve Bank of Australia said it is assessing policy options including currency market intervention and negative rates.

Australia Central Bank Assessing Various Monetary Policy Options

Australia’s central bank is assessing various monetary policy options including currency market intervention and negative rates to meet its inflation and employment goals, Deputy Governor Guy Debelle said on Tuesday.

The Reserve Bank of Australia (RBA) had slashed interest rates to a record low 0.25% in an emergency meeting in mid-March to backstop the economy from the coronavirus crisis.

It also launched an “unlimited” government bond buying program and a cheap funding facility for banks. It has held rates since then, saying it would maintain its “highly accommodative settings” as long as required to support the flagging economy.

On Tuesday, Debelle said the board was assessing other policy options “given the outlook for inflation and employment is not consistent with the Bank’s objectives over the period ahead.”

One option being considered is buying government bonds with maturities beyond three years. The RBA is currently targeting three-year yields at 0.25%.

Foreign exchange intervention was another potential tool, though Debelle said it was not clear whether this would be effective given the Australian dollar was “aligned with fundamentals.”

A third option would be to lower the cash rate without taking it into negative territory. And the final option was negative rates, though Debelle said the empirical evidence on its success was mixed.

The RBA has previously said on multiple occasions that negative rates were “extraordinarily unlikely” in Australia and Debelle reaffirmed that stance.

Short-Term Outlook

With Debelle’s comments leaning toward the dovish side, the news is bearish for the Australian Dollar. Debelle’s remarks supported the RBA’s assessment that the recovery will be bumpy and uneven and very challenging to the labor market. So revealing these options seems to be the most prudent move at this time.

The AUD/USD should continue to struggle this week as interest rate futures are still almost fully pricing in a 15 basis point rate cut in October and the greenback is strengthening on safe-haven buying.

The Aussie meandered since hitting a two-year high at .7414 on September 1 as market pricing shifted rapidly in favor of a cut to the cash rate to 0.1% after its September policy meeting, but the recent price action suggests it may be setting up for an acceleration to the downside now that the trend has changed to down.

The big decision for investors will be following a test of the major retracement zone at .7123 to .7055.

For a look at all of today’s economic events, check out our economic calendar.

This article was originally posted on FX Empire