Starting off the quarter on the right foot
At the beginning of the quarter, the Aussie continued the rebound that had begun towards the end of March. The currency began the quarter as the top performer, strengthening by an average of 1.7% against other major currencies. The reason was a sense of optimism over economic recovery once Covid-19 had disappeared and as the safe-haven Japanese yen was pushed lower, the Australian dollar made gains as risk assets and commodity currencies moved higher. The optimism may have been somewhat premature, but despite some volatility throughout the quarter due to a range of challenges, the Australian dollar remained relatively buoyant throughout.
Demand from China causes volatility
One of the reasons for the volatility was mixed news from China. Early in the quarter, news of a recovery in demand for imports across the board was good news for the Aussie. As the quarter progressed, the announcement of plans to cut coal imports was less welcomed. China is a major importer of Australian coal and a reduction could have a significant impact on the commodity-based currency. However, the currency rose again after this announcement was followed by indications that there would be an increased demand in iron ore from China.
PMIs hint at possible recovery
Mixed PMIs at the end of March didn’t stop the Aussie becoming the top performer and throughout the pandemic, the market has been taking all results with a pinch of salt. April PMIs did not harm the Aussie as much as expected because, despite what AiG described as the “toughest manufacturing conditions since the global financial crisis”, an 18 point drop in the AiG index to 35.8 and the equivalent Markit PMI coming in at a record low of 44.1, these figures were not as bad as their European equivalents. The following month saw further deterioration in the Markit manufacturing PMI, down to 42.8, but a small sign of encouragement in the improvement on the services PMI from 21.7 to 26.4.
The May figures gave further cause for optimism, with services and composite PMIs both in the growth zone at 53.2 and 52.6 respectively and manufacturing edging back towards growth at 49.8. Markit noted that the numbers suggested that Australia was “past the low point in economic activity,” whilst still noting that conditions remained very soft. By June, manufacturing had improved further, with the Markit PMI coming in at 51.2. Services dropped slightly to 53.1 but the increase in manufacturing activity meant that the composite PMI improved to 52.7. The underperformer remains construction, which came in at 35.5 and could be a reflection of subdued confidence.
Reserve Bank of Australia holds rates steady
As expected, the Reserve Bank of Australia (RBA) kept its benchmark Cash Rate unchanged at 0.25% throughout the quarter. Reports that inflation accelerated from 1.8% to 2.2% in the first quarter, with the RBA’s trimmed mean measure coming in at 1.8%, did nothing to dissuade the RBA from easing. Notes from the RBA meeting on 2nd June showed that there was growing concern that accommodative policy and low rates were stoking asset prices. A leaked report also suggested concerns over inflated house prices. RBA Governor Phillip Lowe suggested a review of the inflation target during a seminar about the “Global Economy and Covid-19” and the possibility of its replacement with some other measure. There appeared to be no urgency for action behind the comments, which had no impact on the Australian dollar.
Sentiment improving but not entirely recovered
Over the course of the quarter, the Australian dollar has benefited from a cautious rebound in sentiment. However, as the recent localised lockdown of Melbourne demonstrates, neither the Australian economy nor its currency are entirely out the woods. Much remains unknown about the eradication of the virus and the potential for the economy, which will continue to cast a shadow and create further volatility in currency markets.
Following the Aussie
For much of the Q2, the New Zealand dollar followed the trajectory of its Australian cousin, although it did not always register quite the same level of gains. In May, the Kiwi reached a four-month high against the US Dollar and a 2020 high against sterling, but at the same point, it reached a 20-month low against the Australian dollar. As the quarter progressed, the view of the New Zealand dollar as the Aussie’s poor relation began to diminish due to the resounding success of the country’s lockdown measures. It may be that as Australia braces for the impact of a localised lockdown in Melbourne, the Kiwi may be able to break from the Aussie’s shadow, but equally may be pulled down if events drag the Australian dollar lower.
Lockdown success leads to bounce back
At the start of the quarter, there was a sharp fall in business confidence that put pressure on the New Zealand dollar. Hopes of an easing to lockdown, coupled with the success of the country’s preventative measures meant that both confidence and the value of the Kiwi rose, although the mood remained cautious. The success of the domestic measures was just the first step on the road to recovery. Talk of coordination with Australia regarding the response to the pandemic and the potential for free movement between the two countries was good news for both currencies. As the quarter progressed, an easing of lockdown measures across the globe led to a boost in optimism that helped the Kiwi. In particular, the New Zealand dollar has been making steady gains against sterling in particular. In June, the Kiwi was 4.11% firmer against the pound compared to its performance in May and positive sentiment regarding New Zealand’s response and the rebound of commodity-based currencies appears to be behind the gains.
Reserve Bank of New Zealand floats possibility of further action
At the end of Q1, the Reserve Bank of New Zealand (RBNZ) announced that interest rates would be kept on hold for at least 12 months. This meant that announcements regarding rates were met with little response in the currency market, although rumours of a possible move to -0.5% interest rates did push the Kiwi lower. While the rumours were not confirmed, the RBNZ refused to rule out negative interest rates entirely, which put pressure on the New Zealand dollar, particularly following a similar equivocal statement regarding whether the RBNZ would lend to the government at the start of the quarter. In the meantime, Q2 saw a doubling of the initial QE programme. This had little impact on the Kiwi but an announcement about the RBNZ’s willingness to introduce additional monetary tools as needed pushed the currency lower briefly before it made a recovery.
Riding the wave of sentiment
Positive sentiment regarding the country’s response to Covid-19 has benefited the New Zealand dollar over the last quarter. The success of the country’s early lock down measures meant that investor sentiment recovered 10% in April alone, following record lows in March, and the country has begun the long, arduous road to recovery. The challenge for New Zealand is that the currency is reliant on not just its domestic performance but on a global economic recovery. The response across the world has been mixed, and news of a localised lock-down in Melbourne demonstrates that the situation is far from stable. There may be opportunities to make further gains against sterling if the Kiwi isn’t pulled lower by the Australian dollar, but any signs of a robust bounce back elsewhere in the world may cast the country’s tentative progress in a different light. There are still many unknowns and uncertainties in the second half of the year; New Zealand appears well placed to weather the ongoing storm but the currency will be looking for more than optimism to maintain its Q2 gains.