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AUD/NZD at 10-Week High and “Likely to Run Higher From Here”

The Australian dollar-New Zealand dollar exchange rate rose on Friday to a 10-week high as traders continue to make bets on monetary policy divergence between the RBA and RBNZ. Even higher rates are expected by teams at TD Securities and Societe Generale.

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The Australian dollar was buying as much as NZ$1.057 at one stage on Friday—the most since January-22.

AUD/NZD’s gains are being afforded by the fundamental rule of foreign exchange markets, which is that interest rates are king: higher interest rates, or expectations of such, increase a currency’s value, and the opposite is true when rates are lowered.

Though interest rates have remained at record lows in both Australia and New Zealand since 2016, recent statements by the respective central banks have sparked significant market repositioning, which means traders are now betting on rates coming down earlier in New Zealand than they will do in Australia.

Unlike the Reserve Bank of Australia, the Reserve Bank of New Zealand has stated explicitly that future changes to interest rates will more than likely be in a downward direction: “Given the weaker global economic outlook and reduced momentum in domestic spending, the more likely direction of our next OCR move is down,” it said on March-27.

By contrast, the RBA is officially neutral, and it offers only suggestive remarks that are open to a greater number of interpretations. Appended to the bottom of its statement on Tuesday was this unfamiliar sentence, which some in the market think might signal a shift to an RBNZ-style rate-cutting bias at its May meeting: “The Board will continue to monitor developments and set monetary policy to support sustainable growth in the economy and achieve the inflation target over time.”

Even with the RBA’s ambiguity, prominent forecasters are predicting 1 or 2 quarter-point interest rate cuts in Australia before year-end, though this is not dissimilar to expectations for New Zealand, though as stated above, rates in New Zealand are expected to fall sooner (as early as next month).

AUD to NZD - 1 Week chart to 05 Apr
AUD/NZD - 1 Week chart to 05 Apr

Policymaker rhetoric remains important. Despite similarities in the expectations for future cuts, it is clear that until the RBA becomes as explicitly dovish as the RBNZ, the New Zealand dollar will continue to weaken relative to its Australian counterpart. In late March, analysts at French investment bank Societe Generale said they now envisaged a “process for returning AUD/NZD towards more neutral [higher] levels.” TD Securities said on Friday that “AUD/NZD … is likely to run higher from here.”

Given that Australia is New Zealand’s second-largest trading partner (New Zealand is Australia’s seventh largest trading partner), the Aussie-kiwi FX rate is particularly important to New Zealand’s economy, and therefore its recent increase (3 percent since March-25) will be of no concern to the RBNZ, which will appreciate the boost it offers New Zealand’s exporters.

AUD/NZD has plenty of upside potential given it sits near historically low levels and is 7 percent below the 1.13-1.14 zone that has acted as regular resistance over the past half-decade.

 

 

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