NZD/AUD - Time to buy again?

Posted by Graham Parlane on 25 May 2012

All

There is no doubt that world growth is slowing and early indications are that China too is slowing at a much faster rate than has previously been anticipated.

In this environment, the one currency that looks the most vulnerable to me, is the Australian Dollar (AUD). Over the last 4 years the Aussie has been a huge beneficiary of major investment flows given it’s relatively high yield, its position as a proxy for Chinese growth and its AAA sovereign rating. The ‘long’ positions must be enormous.

In November the RBA started cutting interest rates. To date they have cut a full 1% off the cash rate from 4.75% to 3.75%. During this time the RBA have remained relatively upbeat stating that although the economy was clearly ‘two speed’ (East Coast retail, finance and housing industries very weak – West/North mining booming) the spend from on-going mining investment (capex) would hold the economy in good stead. However, in the last speech on record, the RBA noted that the flow through from mining hadn’t supported the economy quite as much as they expected. Hot on the heels of that significant statement the giant corporate BHP advised that their proposed $80 billion capex program was to be pared back as they saw demand for their products waning. Not good, the last bastion of Aussie growth being undermined (pun intended).

Thus more rate cuts look likely in Australia over time. Contrastingly, whilst the data out of New Zealand has been soft of late, the hurdle to a RBNZ rate cut from the already ‘emergency’ setting of 2.5% looks very high. The likely fillip from the Canterbury situation certainly a major factor in that view. The NZD/AUD is historically very sensitive to a narrowing interest differentials. And this cross is a nice diversification away from pure AUD/USD if you’re already on that trend lower.

Technically the chart looks supportive of this view. The uptrend line off the ‘double bottom’ low of late last year looks to have held nicely this week.

NZDAUD – Click here to view chart

Cheers G.

Tags: AUD, Australia, China, Futures trading, FX trading, NZD, NZDAUD, RBA, RBNZ