AUD/NZD: Will Pair Reach Milestone Exchange Rate?
Matt Simpson | Mar 12, 2014 03:20AM ET
Tomorrow New Zealand's Central Bank Governor Graeme Wheeler is widely anticipated to raise the official cash rate by 25bps to 2.75%. With the AUD/NZD in a steep decline and only 580 pips above parity, will the pair reach this milestone exchange rate for the first time in over 40 years?
- RBNZ likely to raise interest rates to 2.75%
- Only 300 pips above 1997 historic 'free-float' low
- Only 500 pips above parity which it hasn't been for over 40 years
- If rates stay unchanged at 2.5% then expect some short covering
New Zealand and Australia are in completely different phases to their economic cycles. While New Zealand is witnessing increasing dairy prices, a construction boom and on the verge of hiking interest rates, Australia's mining boom is over, business confidence is waning and there are continued concerns over the growth of China (Australia's key export partner).
When, or if, New Zealand raise their interest rates tomorrow it will make theirs the highest among developed countries, which in turn would see money continue to flow into the Kiwi dollar to capitalise on the higher interest rate and push the value of the Kiwi dollar higher. With the Australian economy continuing to look weak and possibility of further interest rate cuts, this will continue to apply downwards pressure on the AUD/NZD.
The Aussie dropped down to 1.0286 in 1997, which is the lowest the pair has been since being a free-floating currency in 1985. At present we are now trading only 300 pips above this historic low in 1997 and at similar levels to the low of 2005. When you consider the pair dropped -1000 pips between Nov '13 - Jan '14 then we could see parity as soon as June if we continue at this rate of decline. Taking the above into consideration I think it would be rude not to see parity.
Interestingly the previous 2 cycles lows between 1997 and 2005 are approximately 8.5 year apart which so happens to coincide with a June 2014 cycle low. So would this be the beginning of a new bull rally on the Aussie? Somehow, I doubt it as we would have to see significant improvements from the Australian economy along with sustained Chinese growth before we would see a rise in interest rates and money flowing back into the AUD. So whilst there is an argument for 'A' cycle low I doubt it will be a 'the' major cycle low.
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While the markets deem tomorow's interest rate rise as an almost certainty, the chances are this is already priced into the market and the downtrend is stil being fuelled by Australian and Chinese woes. Still, the rise in rates will attract money into the Kiwi so I suspect we will at some point be testing the lows of 2005 and 1997 soon.
For those seeking to trade the actual release be aware that a 'no change' could have detrimental effect on price as this would shock the market. Then we could expect to see price gaps and abnormally wide spreads which can make a safe entry very difficult to time. So one approach is to wait for the release to occur, asses if this is in line with your technical and findamental view, then seek a trade in the direction of your analysis once price has pulled back to either a support or resistance level.
With the NZD/JPY in a long-term uptrend then I would expect to see this trend as the pair continues to be targeted for the carry trade. As long as we hold above 85.70 then I expect we will see 89.00, perhaps even this week. A break below 85.70 would then target 84.00 with only a break below 81.39 low raising concerns of a much deeper pullback. However taking into account the positive sentiment in NZ and money flowing into it I continue to favour the bullish bias and to see the pair around 90.
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