New Zealand & Australian Dollar Lead the Charge Higher on Good News out of China on Coronavirus
- China to lift quarantine restrictions
- AUD and NZD rally amidst improved sentiment
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- GBP/AUD spot at time of writing: 1.9597
- Bank transfer rates (indicative): 1.8910-1.9050
- FX specialist transfer rates (indicative): 1.9200-1.9420 >> More information
As Western economies enter stricter lockdown phases to counter the spread of the coronavirus, news that China will lift travel bans in Hubei province from Wednesday serves as a rare pice of good news for markets.
China was first to shut down owing to the spread of the virus and now appears to be the first country emerging out of the crisis.
This is a constructive development for those currencies that are most exposed to the performance of the Chinese economy, particularly the Australia Dollar and New Zealand Dollar while it also aids a recovery in overall investor sentiment generally.
"Optimism returns in FX markets with high-beta AUD & NZD charging higher. Follows a green wave in Asian equities. News China is on the path to returning to some normality with Hubei province to remove travel bans tomorrow means Asia's COVID-19 economic cycle is close to a bottom," says Viraj Patel, FX and Macro Strategist at Arkera.
The Pound-to-Australian Dollar exchange rate has fallen below 2.0 once more to quote at 1.9574, while the Pound-to-New Zealand Dollar exchange rate is half a percent lower at 2.0067. The Australian-U.S. Dollar exchange rate is up a chunky 1.34% at 0.5953 while the New Zealand-U.S. Dollar rate is at 0.5805.
The easing of restrictions by Chinese authorities comes after Hubei province reported new infections dropped to zero on March 19, suggesting the spread of the disease had all but been contained.
Authorities have added they will lift restrictions on citizens in the town of Wuhan - the epicentre of the global virus pandemic - from April 8.
China initiated a strict lockdown in Wuhan and Hubei province on January 23, thereby restricting the movements of 60 million people and setting the Chinese economy on the path to a sharp economic slowdown that translated into significant falls for the Australian and New Zealand Dollars.
China is Australia's main trading partner, and a fall in economic activity owing to the lockdown was immediately reflected in valuations of the Australian Dollar. As a result, the Australian Dollar is now 16% down against the U.S. Dollar in 2020, down 12% against the Euro and 4% against the Pound.
It appears global markets have responded positively to the news that the coronavirus is losing its grip over China, with Asian markets trading in the green and European bourses appear set to follow.
Global investor sentiment is another key driver of performance in the New Zealand and Australian Dollars: when markets are rising the two currencies tend to find support.
This relationship is true at present, but we wonder if the two antipodean currencies will continue to enjoy this relationship now that both the RBA and RBNZ have slashed interest rates to just 0.25% and have announced significant quantitative easing programmes.
The RBNZ on Monday announced it would purchase N$30BN of New Zealand Government Bonds over the coming twelve months - with a range of maturities - in order to push down the yield paid on those bonds, thereby lowering the cost of borrowing throughout the economy.
On Thursday March 19 the RBA said it would initiate a programme of buying as many government bonds as is needed to ensure the yield on 3-year government bonds stays low and around 0.25%.
With interest rates in New Zealand and Australia likely to be extremely low by historical standards as a result of these actions, we don't expect the AUD and NZD to exude the same high-return qualities that they once did.
Therefore, we would not be surprised to see their relationship with risk sentiment shift over coming weeks and months.
