AUD/NZD and the RBA and RBNZ divergence [Video]

Giles Coghlan LLB, Lth, MA Financial Source

Last week both the RBA and the RBNZ met, but their policy responses were quite different and a divergence has opened up between them. The RBA hiked by 25bps, but there had been a 50% chance that it would hike by 50bps according to short-term interest rate markets. The RBNZ, by contrast, hiked by 50bps and had mooted the idea of a larger 75bps rate hike.

The forward guidance was different too. The RBA has taken a more cautious note recently on further rate hikes and expressed some concerns about its domestic economy and the slowing global economy. Short Term Interest Rates are priced in a lower terminal rate after the last meeting.

The RBNZ, by contrast, had a far more hawkish perspective and Governor Orr stated in the annual report on Oct 11 that ‘there is more work to do and increasing the official cash rates the most effective way we can reduce inflation and support maximum sustainable employment’. This hawkish comment was reflected in the terminal rate which is currently set to be just under 5% for May 2023 next year.

This divergence should favour AUDNZD selling in the near term with a divergence in the central banks’ move relative to the market’s pricing for their rate decisions.

Major trade risks: The major risk here is if the RBA or the RBNZ make any significant announcements that change this outlook.

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Author

Giles Coghlan LLB, Lth, MA

Financial Source

Giles is the chief market analyst for Financial Source. His goal is to help you find simple, high-conviction fundamental trade opportunities. He has regular media presentations being featured in National and International Press.

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