AUDNZD

It’s been a day of differing fortunes for the antipodean currencies...

The bullish wedge on AUD/NZD continues to play out nicely, having reached a 10-week high as of yesterday. But the trend may be in need of a pause, before further gains materialise.

Although the trend points lower, mean reversion appears likely over the near-term according to some indications.

The Reserve Bank of Australia (RBA) will make its rate decision in the early hours of Tuesday, which makes the Aussie the main focal point during the Asian session.

This week’s key macro events are mostly out of the way. However we still have key data coming from the Antipodean nations in the early hours of Thursday and from Canada on Friday. So the focus is now going to turn to the commodity currencies.

The focus of the FX markets will start to turn to the New Zealand dollar.

After such a busy week of currency-moving events, the week ahead slows down considerably, but still features two major central bank decisions – the Reserve Bank of Australia (RBA) on Tuesday and the Reserve Bank of New Zealand (RBNZ) on Thursday.

The AUD/NZD has enjoyed a massive rally today, rising a good 270 pips from the low to the high.

The New Zealand dollar’s slump continues. Poor domestic data followed by a dovish RBNZ and now cuts in growth forecasts by the government have all applied intense pressure on the kiwi in recent weeks.

The New Zealand dollar has slumped in recent weeks, first on the back of poor NZ data and then after the RBNZ delivered a dovish policy statement, in which it suggested that monetary policy will remain accommodative for a long time. The Australian dollar has held its own slightly better, thanks mainly to firmer metal prices. As a result, the AUD/NZD has been able to climb higher. Unless something changes dramatically in the coming days, I think this cross will be heading further higher.

The Reserve Bank of Australia is widely expected to hold interest rates unchanged at the conclusion of its policy meeting in the early hours of Tuesday. Given the soft domestic inflation figures and what the RBA Governor Philip Lowe had said last week – that the central bank would not follow the footsteps of its counterparts’ recent tightening – it would come as no surprise if the bank comes across as more dovish than hawkish.

The Reserve Bank of Australia is unlikely to change interest rates tonight from the current historic low rate of 1.5 per cent. But it may become the latest central bank to turn hawkish following three months of stronger-than-expected jobs growth in Australia, improvement in Chinese economy and stable financial conditions around the world.

The AUD/NZD has retreated noticeably in recent weeks. The NZD has been supported by a slight improvement in New Zealand data and thanks to firmer dairy prices, while the AUD has been undermined by slumping metal prices. The Reserve Bank of New Zealand will be making its latest policy decision tonight and the focus of the FX markets will be on the NZD as a result.

Given the dollar's uncertainty, it may be best to take USD out of the equation and instead concentrate on a currency cross – for example the AUD/NZD, which is fast approaching a key technical area

The wait is almost over: the Fed is highly likely to announce an interest rate rise at 18:00 GMT. But we have already covered the Fed extensively, so I won’t be writing about it in this report. Understandably, a lot of our readers will want to look for ideas that does not involve the US dollar – or a central bank meeting for that matter, as the Bank of Japan, Swiss National Bank and Bank of England will also have their own rate decisions coming up on Thursday.

With data from Australia and its largest trading partner coming in stronger, it was a good day for the Australian dollar. However the AUD/USD didn’t find much joy because of the US dollar’s advance. But against other currencies, the Aussie’s strength was clearly evident, for example against that of its neighbour: New Zealand.

Next week is all about this Australian and New Zealand dollars. We will hopefully find out which of the two currencies is stronger relative to the other one as central banks of both nations have their policy decisions

The AUD/NZD could be about to turn decisively higher. Last night’s RBA policy statement was as neutral as it could get. More to the point, there were no hints of further interest rate cuts. In contrast, the RBNZ suggested at its last policy statement that more rate cuts could be on the way. This alone makes me think that the AUD/NZD may have bottomed out.

The Australian dollar gapped lower at the open overnight on fears Australia’s election deadlock could jeopardize the country’s AAA ratings.  While the result will not be decided until at least Tuesday, the AUD/USD and AUD crosses have all recovered remarkably well. The AUD/USD has bounced 100 pips from its overnight low of around 0.7445 to reach a high so far of 0.7545, while the AUD/JPY has recovered from a low of 76.28 to reach a high of 77.40.

The AUD/NZD’s recent depreciation is mainly due to a surprisingly dovish RBA, which decided to follow the footsteps of the RBNZ by cutting interest rates. At 2.25%, interest rates in New Zealand are still one of the highest among the developed economies. In Australia, they are now at a fresh record low of 1.75%. The 50 basis point difference makes the NZD a more attractive currency than the AUD for yield-seekers. But it is not just about the current interest rates that impact a currency pair. Rather, it is the changes in expectations about the future path of interest rates that drive the markets. These expectations continually change for a number of reasons, including incoming domestic economic data, central bank comments, significant fundamental developments in the economies of their trading partners and, in the case of AUD and NZD, changes in key commodity prices.