Forex Investment and Currency Trading

AU vs NZ rates

Individually, AUD and NZD are more sensitive to market demand for high yielders and drivers of this, such as risk appetite, than to their own interest rate dynamics, But the AUD/NZD cross is another story, as are the crosses between pairs of funding currencies. The depreciation of AUD/NZD since
late-June/early-July is primarily explained by the 2 year spread collapsing from +20bp (in AUD’s favour) to -77bp as sharply slowing global growth has led to a “catch up” rise in expectations for RBA easing. Near term, this may have gone too far, but longer term it will continue to weight on the
AUD/NZD cross.

Commodity prices

Relative movements in Australia weighted and New Zealand weighted commodity prices are also a powerful determinant of AUD/NZD fair value. The recent AUD/NZD rallies have been strongly associated with industrial and energy commodities out-performing agricultural and soft commodities.
The prospect of sharply weaker global growth has recently seen this ratio peak, though it is still high by historical standards. Although there is scope for further downside, relatively robust bulk commodity prices (negotiated directly rather than exchange traded) will limit the downside, as will sharply weaker dairy prices.

Financial exposure

Although NZD is generally perceived riskier than AUD (larger external deficit, less liquid, etc), the opposite may be true when risk aversion is being driven specifically by concerns on financial stability, as recent experience shows. The Australian equity market (ASX) is much more heavily weighted towards financials (43%) than the New Zealand market (NZSE50), where financials make up just 30%, leaving Australia relatively more exposed to the global financial meltdown. The NZ equity market, like the economy, is skewed towards consumer stables, rather than financial and cyclicals.