After a rather severe shock, caused by the bankruptcy of SVB, the fall of the banking sector as a whole and investors' flight from Credit Suisse, which led to the UBS Bank takeover (and in fact – a full-fledged bankruptcy), both stock prices and bond yields then increased on Wednesday. Global banking fears still persist, but the Federal Reserve's, as well as other central banks', quick actions noticeably, if not restored confidence, reduced tension.
The markets seem to have confirmed that there will be no global collapse of the banking system. However, we must proceed from the fact that the central bank is forced to use the same mechanism it used during the 2008 crisis – to supply liquidity to those in need. This means, among other things, an almost instantaneous refusal to reduce the balance sheets of the central bank and a slowdown in the growth rate of interest rates as the main means to combat inflation. And if the economies of most countries as a whole withstand the tightening of financial conditions and do not slip into recession, then the banking sector is on the verge of being stable.
In connection with the latest events, the Fed meeting on Wednesday is of particular importance. The US central bank cannot allow the risk of a loss of confidence, so the previously planned rate hike is likely to occur, and the rhetoric should remain upbeat and reassuring. This is the outcome that the markets are guided by, rolling back from the minimum levels. The crisis, if it is inevitable, will develop later, but not in the coming days, so for now we are focusing on the fact that the demand for risk will remain stable until the end of the week.
New Zealand's annual current account deficit was $33.8 billion (8.9% of GDP) in Q4 2022, a record level. GDP growth turned negative, falling from 2% to -0.6%, but there is no particular concern yet. ANZ Bank believes that the current account deficit will increase, and inflation will be more stable, as the growth of the influx of migrants, tourism and economic demand will contribute to this.
The banking crisis adds uncertainty to what actions the Reserve Bank of New Zealand will take next. Financial stability in the country strongly depends on offshore financing, and no one knows yet how the speed and direction of financial flows will change. If we pay attention to the dynamics of interest rates in New Zealand and the United States, we can note an increased yield spread in favor of New Zealand, and if this trend continues, the growing spread can provide significant support to the kiwi in the long term.
The rate peak is currently projected at 5.25%, and this is higher than the Fed's upper limit. Risks introduce a lot of uncertainty, for example, the depth of the unfolding banking crisis is not at all clear, the housing market is actively slowing down (housing prices in February fell by 1.1% and by 16% relative to the peak since November 2021, house sales in February decreased by 11.4% m/m, the number of house sales is at a record low for the entire history of observations since 1992).
So far, the direction of financial flows has not been formed, the estimated price, taking into account the inflow of capital into bonds and stock indices, is directed downward, which indicates that the US dollar is perceived as a more reliable instrument in the current conditions.
NZDUSD, as we assumed a week earlier, reached the resistance of 0.6271, but failed to gain a foothold higher, and the chances of continued growth became lower due to growing risks and growing demand for protective assets. Growth above 0.6280 is considered unlikely, a more likely scenario is for it to fall to support at 0.6079.
Australia's economy is slowing, but remains resilient. In 2022, GDP growth was 2.8%, in 2023 0.7% is expected, although, according to the NAB bank, the country will not slide into recession. A slowdown in growth should lead to a decrease in demand for labor, which is expected to raise the unemployment rate to 4.7%, an increase in unemployment should eventually lead to a decrease in wage growth and, as a result, a decrease in inflationary pressure.
Inflation is already slowing down, as in most countries, but reaching the upper limit of the target range of 3% is expected no earlier than the end of 2024. And if expectations for the Fed rate have sharply decreased, the forecasts for the Reserve Bank of Australia rate remain quite stable for now, two 0.25% hikes are expected at each of the next two meetings, the peak rate of 4.1%, which will remain until the beginning of 2024.
Since the Fed is expected to cut the rate in the summer, the yield spread, which is currently in favor of the dollar, will begin to fade in the second half of the year. In the long run, this will provide the aussie with the chance to rise against the dollar.
All these arguments look logical, but only if a large-scale banking crisis does not occur and does not spread further. If the crisis develops, then these calculations will become irrelevant, but in this case any forecast will be overgrown with conventions that make it meaningless.
The estimated price is going down, so in the short term, we should expect AUDUSD to fall due to a sharp increase in demand for protective assets.
The AUDUSD's bullish correction has ended before the pair reached the resistance area of 0.6780/90, and it is unlikely for it to return to this level. I assume that the pair will continue to fall, the support zone of 0.6570/85 will be tested in the near future, after which the target will shift to the technical level of 0.6466.