Central bank divergence
A key trading principle in the FX world is trading a strong currency against a weak currency. In this way it is more probable to predict direction in the pair. A great example of this is now occurring in the AUDNZD pair. We have reasons for continued NZD weakness agains the AUD.
What's the rationale for the outlook?
The RBNZ yesterday confirmed that it is prepared to consider using negative interest rates to boost the economy. At its latest policy decision the RBNZ has launched a set of bearish policies. Firstly it extended its asset purchases programme and revealed an openness to negative interest rates. The RBNZ increased their quantitative easing (LSAP) programme to $100bn and extended the length of the programme from 12 to over 20+ months. Furthermore, the RBNZ expressed their general reference for a lower /negative OCR and a 'Funding for Lending Programme'. Bearish stuff. The impact in the NZD 10Y bond market was telling
The RBA is not pursuing negative interest rates. At present they would be an unlikely course of action. For the the Reserve Bank negative interest rates would be a stimulatory benefit by putting downward pressure on the Australian dollar but are probably wary that negative interest rates can cause stresses in the financial system. So, as a result the AUD should remain stronger against the NZD. Therefore, buying on dips makes sense for the AUDNZD pair as long as this central bank divergence remains the same.
