Are Aussie and Kiwi About to be Favored this Year?

The coronavirus spread will be the most important factor influencing economic activity on a global scale this year, and as a result, each country’s ability to contain the virus will create differentiation. During the past two months, a broad debate on whether Australia and New Zealand could be able to limit the pandemic had emerged, and there are several reasons to believe that might happen.

Geography as the main denominator

A multi-week rally had been seen across all financial markets and risk currencies had stopped underperforming against the US dollar. However, problems are far from over and despite the economic damage which will be felt for years to come, the main issue now is containing the virus via various mitigation methods. Australia and New Zealand are advantaged by the fact they’re islands in the middle of the ocean, increasing their ability to stop infected people coming from abroad.

Strong border control measures will be required, but if successful  the virus will pose a limited threat. At the time of writing, there are around 7,000 cases of COVID-19 in Australia and less than 1,500 in New Zealand. This means local governments don’t need to impose lockdowns and thus the economy won’t have to suffer that much. Weak economic output abroad will have an impact, but at least domestic risks are easier to contain.

Aussie and kiwi looking forward

Taking this into account, it turns out that the Australian Dollar and the New Zealand Dollar could be some of the favored currencies. Since March 19th, AUDUSD had rebounded from 0.55 to 0.65, while NZDUSD had a weaker performance, after recovering from 0.55 only to find resistance around 0.61.

We must consider that all central banks had been very active in using extraordinary monetary policy tools and as a result, some fears of a currency war globally had started to emerge. Having their currencies strengthen is not ideal during an economic downturn but moving forward we should expect to see some currencies perform better as compared to others.

Both the AUD and NZD had spiked impulsively higher after the March selloff ended. Forex volatility spiked but once the dust settled, both currencies had been outperformers. On the other side of the spectrum, the Euro and the Yen had been weaker as both the ECB and BoJ had to be more aggressive with their policy tools. Looking ahead, it is very likely that the AUD and NZD will continue to perform better, especially against currencies showing weakness in the past few weeks.

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