RBA cutting back QE, RBNZ nearly doubling it – what does it mean for the AUD/NZD?
The Coronavirus and resulting lockdown of the economy has spared no countries, including Australia and New Zealand, even though both countries haven't imposed as strict measures as countries in the eurozone or the US.
The Australian economy saw a jump in its unemployment rate by 1 percentage point to 6.2% and is expected to rise up to 10% by the end of Q2/2020 with first estimates showing the unemployment rate in Australia to stand at 9.00 in 12 months from now.
Despite economic collapse: Aussie with strong performance against the Kiwi
Despite the Aussie performing very strongly against New Zealand's Kiwi, gaining around 8% in two months from its March lows of around 1.0000.
The reason for that performance is probably the more sceptical economic outlook and potential countermeasures from the RBNZ: while the unemployment rate in New Zealand is expected to be around 8% by the end of Q2/2020 and to stand at 8.5% in 12 months from now, the GDP Annual Growth Rate in New Zealand is expected to be around -11% by the end of Q2/2020 compared to 'only' -7% in Australia at the end of Q2/2020.
As a result, the RBA curtailed its Quantitative Easing as financial market conditions started to improve a little and decided against buying government bonds at the last meeting at the beginning of May.
On the other hand, the RBNZ nearly doubled its QE purchases to NZD60 billion from NZD33 billion and opened the door to negative rates at her last meeting.
That monetary policy divergence given, the mid-term advantage in the currency pair seems to be on the long side.
How to trade AUD/NZD in this environment?
Still, we are not that optimistic for AUD/NZD, at least not in the coming two weeks.
First of all, we consider the mode technically to be quite extended on the upside with the currency pair finding a strong region of resistance around 1.0800/50, its 2019 yearly highs thus favouring at least a short correction into the region around 1.0700/50.
In addition to that, AUD/NZD also enters a bearish seasonal window which developed over the last 25 years during the time span between May 19 through May 27 and delivers a chance for us to formulate an idea how to possibly trade AUD/NZD from the Short side.
The key parameters of this seasonal bearish pattern are: between May 19 and May 27, AUD/NZD saw an average drop of 133 pips for 18 of the past 25 years.
In the remaining seven years, it gained on average only 40 pips, while the maximum loss and the maximum drawdown being 149 pips.
That in mind, Long engagement in AUD/NZD, even though justified from a fundamental perspective, get unattractive and we favour AUD/NZD Short trades with a stop above 1.0850 and 1.0680/0700 as a target on the downside between May 19 and May 27:
Source: Admiral Markets MT5 with MT5-SE Add-on AUDN/ZD Daily chart (between March 5, 2019, to May 15, 2020). Accessed: May 15, 2020, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.
In 2015, the value of the AUD/NZD increased by 1.8%, in 2016, it fell by 2.7%, in 2017, it increased by 6.2%, 2018, it fell by 4.7%, 2019, it fell by 0.6%, meaning that after five years, it was down by 0.5%.
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