The AUD/USD exchange rate seems to be growing today by more than 0.3 percent. The NZD/USD currency pair grew more, by 0.5 percent. Decisions of the central banks of Australia and New Zealand may be the potential reason for their currencies.
Investors are used to looking at the actions of the Federal Reserve as the key central bank in the world. Meanwhile, today the actions of the monetary authorities of Australia and New Zealand seem to be more interesting.
Australia starts tapering
With today's decision, the Reserve Bank of Australia kept the key interest rate at a record low of 0.1 percent, which was in line with widespread market expectations. The RBA also maintained its yield curve control program at 10 basis points until the April 2024 bond maturity and will continue its bond-buying program of $5 billion per week until early September, followed by $4 billion per week until at least mid-November. As a result, the Bank of Australia is beginning what is known as tapering, i.e. reducing the asset purchase program.
The RBA conveyed that the latest wave of COVID-19 outbreak is interrupting the economic recovery. Indeed, Australia's GDP is expected to decline in Q3. The economic outlook for the coming months is uncertain and depends on the health situation and containment measures for the virus. The bank assumes that the economy will grow by 4 percent in 2022 and by about 2 percent in 2023. An assurance was also given that interest rates will not be raised until inflation is in the 2-3 percent range, a condition that will not be met before 2024.
Mortgages are harder to get in New Zealand
As a result of the start of monetary tightening in Australia, the AUD/USD exchange rate appears to have risen by more than 0.3 per cent today. Meanwhile, the NZD/USD exchange rate rose more strongly today, by 0.5 per cent. The change in quotations may be related to the Reserve Bank of New Zealand announcement that it plans to further restrict access to mortgages as house prices rise, which is seen as a form of monetary tightening.
Money markets seem to be seeing investors increase their exposure to a rate hike in New Zealand as early as this month. A sharp rise in inflation in July, which exceeded the central bank's target range for the first time in 10 years, has already put a rate hike on the table with a 75 percent probability. In contrast, the interest rate market appears to be pricing in a 100 basis point rate hike by mid-2023.
Australia and New Zealand seem to be coming to the forefront of interest rate hikes among the world's major central banks.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
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