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FUNDAMENTAL ANALYSIS

AUD/NZD: Milking the Market

AUDNZD, Milking, Market, AUD, Bank of Australia, Reserve Bank of New Zealand, NZD, Fundamental Analysis, fx trader, forex

30 Mar 2016

The Reserve Bank of Australia and the Reserve Bank of New Zealand are the only two central banks in the region with well positive key deposit rates. The RBA currently holds 2.00% and the RBNZ 2.25%. Hence, there’s a 25 basis point premium to carry Kiwi. Deposit rates like that are bound to attract attention in negative rate regime region.

However, it’s precisely what both banks are trying to avoid; strengthening currencies. Strangely, the Yen is still the regional flight to quality trade in spite of introducing a tiered negative rate policy. As surprising as BOJ the announcement was, it just didn’t seem enough to defend the Yen. Of course, this may only have been an initial measure. BOJ Governor Kuroda has managed to keep markets on the back foot with his seemingly random, unexpected steps. Further, the more predictable ECB cut rates across the board, including the introduction of a negative deposit rate.

The Reserve Bank of Australia has been steadfast with its 2.00% cash rate policy. The last policy rate change occurred in May of 2015. It’s possible that the RBA decided to risk ‘the lesser of two evils’: either lowering rates further and fuel an already inflating property market or choosing to maintain rates, keeping as tight a lid on property prices as possible but risking the health of the economy. 

There might have been another critical consideration: as a heavily dependent commodity export economy, lowering rates would have had little effect. The collapse of commodity demand was almost entirely due to the refocusing Chinese economy which may have already stockpiled more industrial commodities than it could possibly use; the reduced demand for industrial commodities from other nations dependent on China’s economy; continuing increase in global petroleum production exceeding demand and filing global storage capacity to the brim thus deflating prices and lastly, little improvement of the global economy in general. What might a slightly weaker Aussie accomplish?

This was noted in the December 2015 RBA policy meeting1: “... Key commodity prices are much lower than a year ago, reflecting increased supply, including from Australia, as well as weaker demand. Australia's terms of trade are falling... ... The pace of growth in dwelling prices has moderated in Melbourne and Sydney over recent months and has remained mostly subdued in other cities...” The statement concluded by noting that the RBA had the leverage needed to reduce further, if that became necessary.

AUDNZD, Milking, Market, AUD, Bank of Australia, Reserve Bank of New Zealand, NZD, Fundamental Analysis, fx trader, forex Price Event ChartAUD/NZD Price Event Chart

Up until the December meeting, the Reserve Bank of New Zealand maintained a 75 basis point spread over the RBA cash rate. The RBNZ reduced that spread by 25 basis points via a cash rate reduction at its policy meeting 10 days later. It should be noted that the Kiwi strengthened following the meeting, attempting to test Kiwi resistance at $1.0534 per Aussie, (based on a 1 year Fibonacci retracement). It’s also important to note that this strengthening move continued through the RBNZ OCR reduction on 10 December and halted and reversed after the 25 basis point US Fed move on 17 December. The combined Fed action and RBNZ action narrowed the Fed – RBNZ spread by 50 basis points. Might the Fed have been the driving force behind AUD/NZD?

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