Currencies | Dec 10 2009
By Chris Shaw
Given a significant shift in policy by the Reserve Bank of New Zealand (RBNZ) with respect to bringing forward the timing of increases to official interest rates, Commonwealth Bank chief currency strategist Richard Grace sees three reasons for going short the Aussie dollar against the New Zealand currency at present.
The first is the bringing forward of the timing of rate hikes in New Zealand noted above will put downward pressure on the Australia-New Zealand two-year bond spread, the result of this being downward pressure on the interest rate sensitive AUD/NZD exchange rate.
The second reason for shorting the Aussie dollar against its Kiwi counterpart is because New Zealand historically has had greater inflation challenges than Australia given the differences between the two economies, meaning the RBNZ tends to be more aggressive when it does tighten monetary policy.
This trend is likely to hold this time around, Grace expecting the RBNZ will kick of its policy changes with a 50-basis point lift in rates in April next year, bringing the cash rate to 3.0%. This is not fully priced into the market at present as the overnight index swap interest rate is currently at 2.56%, and so will impact on the AUD/NZD exchange rate as the market fully prices in the size of the likely RBNZ move.
The other factor Grace expects will support the New Zealand dollar is the AUD/NZD rate tends to fall when global growth is revised higher as New Zealand has a far higher export to GDP ratio at 31% compared to Australia’s 21%, while it also has a higher net commodity exposure.
Given these factors Grace suggests selling the AUD/NZD at around $1.2660, with a target on the position of $1.20. He suggests setting a stop on the trade at $1.2885.
