Time to go negative?

Sean Callow

Westpac Bank

Negative interest rates were a hot topic this week. President Trump repeated his support for the idea but even prior to this, several Federal Reserve officials said they did not view a negative funds rate as an attractive policy option.

In a webinar this week, Fed Chair Powell said that the FOMC’s view had not changed from October when staff briefed the committee, who concluded that among other arguments, negative rates could have more significant adverse effects on market functioning and financial stability in the US than abroad.


So while it may be understandable for a former real estate developer to like the idea of borrowing at a negative interest rate, the Fed has made its stance clear, while not entirely ruling out the idea. This has not stopped mid-2021 Fed funds futures contracts from trading with fractionally negative implied yields.

The damage the prospect of a negative policy rate can do to a currency was clear from the RBNZ meeting this week. The kiwi fell as the RBNZ said that a negative cash rate “will become an option in future” and that “discussions with financial institutions about preparing for a negative OCR are ongoing.”

The RBA in contrast is more in line with the Federal Reserve, not finding a negative cash rate to be appealing while not ruling it out entirely. As a result, the Aussie Kiwi cross rate reached highs since November 2019 and the kiwi is weakest in the G10 against the US dollar over the past week. However, most major currencies have seen only modest net movement over the week, reflecting the range-bound trading of equity markets.

The Australian dollar is a little softer this week, partly in response to Australia’s April labour force survey. Australia’s headline unemployment rate rose only 1 percentage point to 6.2% but the underemployment rate of 13.7% is more indicative of the sharp deterioration in the job market, as is a stunning 9.2% slide in the number of hours worked in April.

There is likely to be further grim news on the job market ahead, even as some businesses reopen in some states this week. But these reopenings include tight distancing restrictions such as limiting pubs to only 10 patrons. Many businesses will not find it profitable to reopen under these conditions so economic activity will not rebound quickly.

Furthermore, trade tensions have picked up again, with China threatening tariffs on Australian barley and banning beef from 4 Australian abattoirs. This is a fresh concern for the Aussie dollar, though on the positive side, the iron ore market is benefiting from recovery in China’s factories, with prices this week rising to $90 a tonne.

In the week ahead, the US focus will be on Congressional testimony by Fed Chair Powell while in Australia, the data highlight is April retail sales. After a record rise in March driven by hoarding of essential items, April should be quite a different update on the consumer. 

Sean Callow
Senior Currency Strategist
Westpac Bank

Sean Callow is Westpac Bank's Senior Currency Strategist, based in Sydney. Sean focuses on the Australian dollar and other G10 and Asian currencies. He has worked in strategy and economics roles in New York, London, Singapore and Melbourne.

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