Kay Van-Petersen
Saxo's global macro strategist Kay Van-Petersen examines the big issues for the markets including AUDUSD, potential US-China trade war and interest rates.
Article / 07 September 2016 at 3:41 GMT

Aussie and Kiwi marching to the beat of their own drum

Managing Director / Technical Research Limited
New Zealand
  • USD reacted negatively to the poor ISM non-manufacturing data
  • High-beta currencies such as NZD and AUD were major beneficiaries, alongside JPY
  • NZDAUD parity a good bet for the first time in 40 years
  • As Sep rate hike is less likely, it's onwards and upwards for Australasian currencies
  • Commodity prices are holding up, clearing way for further gains against USD 

By Max McKegg

The services sector has been the main contributor to US growth over the past few years so it was no surprise to see USD react negatively to the poor ISM non-manufacturing survey result. 

 The NZ dollar got a dairy trade boost and the Aussie was buoyed by a strong GDP figure. Photo: iStock

High-beta currencies such as the NZD and AUD were the major beneficiaries, alongside JPY. The Kiwi got an extra boost from a strong dairy trade auction, propelling it to a 15-month high, and making NZDAUD parity a good bet for the first time in 40 years. Meanwhile, the Aussie held onto yesterday’s gains in the local trading session today after a strong second-quarter GDP number matched expectations.
As this chart shows the odds of a rate hike in the US before the end of the year have settled back close to 50:50 after flirting with 70% last week. September looks to be a dead duck: the best dollar bulls can hope for would be a warning shot fired across across the bows of complacent markets. Onwards and upwards for the Australasian currencies then as their economic fundamentals stand out from the pack.

Fed Funds chart (click to enlarge)

 Source: Metastock

Global dairy prices have jumped 40% this year as lower production in the European Union coincides with firming demand out of China. As the world’s largest dairy exporter, New Zealand is a major beneficiary. As this chart shows, futures prices have been a good indicator of the fortnightly Global Dairy Trade (GDT) auctions and so it was again this time around. The supply-demand balance is expected to restore itself in coming months and prices will not maintain this rate of ascent. Nevertheless, falling commodity prices had been the only thing casting a shadow over the country’s economic growth rate of late and now they are turning into a positive.


Source: Bank of New Zealand 
New Zealand has become a victim of its own success. Next week’s GDP update is expected to show an expansion of around 3.5% year-on-year. This level of activity, although supported by booming immigration, is above potential and in normal circumstances would put upward pressure on input costs and, in turn, the consumer price index. But, ironically, the markets are “rewarding” New Zealand for its success with a stronger exchange rate and hence falling import prices. The net effect is that the third-quarter inflation update due mid-October is likely to show the CPI running close to zero year on year, hopelessly below the Reserve Bank of New Zealand’s 1%-3% target band.
Critics say the RBNZ has created a rod for its own back by stubbornly holding the official cash rate well above that of the G10. Market pricing suggests an 80% chance the rate will be cut 25 basis points to 1.75% in the Monetary Policy Statement due for release on November 10, but with the Trade Weighted Index now moving away from the trajectory required to bring inflation back into the target zone (see chart below) the odds of a pre-emptive move at the bank’s less formal meeting on Sept 22 are growing.

NZ TWI chart (click to enlarge)

Source: Metastock
The Reserve Bank of Australia doesn’t make exchange rate projections when updating its economic forecasts, simply assuming the current level will prevail into the future and adjusting its policy rate to compensate if necessary.
Yesterday RBA Governor Glenn Stevens chaired his final monetary policy review meeting prior to handing the baton over to his deputy Philip Low. The post-meeting statement suggested the bank is relaxed about the way the economy is progressing, even though inflation is expected remain “quite low for some time”. Clearly the bank’s board is placing no pressure on itself to push inflation back up into the 2%-3% target band in a hurry, instead judging that “holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time”.
The bank’s expectation of ongoing “sustainable growth” was supported by the second-quarter GDP numbers released today showing the economy expanding 3.3% year on year. This is well ahead of the RBA’s estimate of potential at 2.75% and will give the bank hope that, all things being equal, inflationary pressures will emerge. However, as in New Zealand, all else is not equal: an appreciating Aussie dollar will “complicate” matters.
We will find out whether the government is as relaxed about below-par inflation shortly when the new governor signs a performance agreement with the Treasurer. There is some talk the inflation target range could be lowered to 1%-3% or RBA’s forecast period extended to three or four years to give it more flexibility around meeting monetary policy objectives. There has been some minor party support for such moves in the parliament.
In a world of subdued economic growth and zero-bound interest rates, the Aussie and Kiwi dollars are marching to their own drum. Their Achilles heal – commodity prices – seem to be holding up well, at least in the short term, clearing the way for further gains against a USD unable to gain any traction.

Read my AUDUSD trade view here.

– Edited by Susan McDonald

Max McKegg is managing director of Technical Research Limited. If you would like an email notice each time Max posts a trade or article then click here or post your comment below to engage with Saxo Bank's social trading platform.

Patto Patto
Max, as the RBNZ is so committed to an exchange rate path, do you think there's a chance they will intervene in the FX market, if for no other reason that to introduce some two-way friction into NZDUSD ?
Max McKegg Max McKegg
Can never say Never but doubt it anytime soon !
abach abach
Good analysis. I only disagree with the forecast that commodity prices will be strong. In this environment of decreasing demand and consumption globally this is not what will happen....


The Saxo Bank Group entities each provide execution-only service and access to permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on or as a result of the use of the Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer
- 沪ICP备13028953号-1

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail