Aussie + Kiwi could turn out to be a topspinner

#AUD and #NZD eyed with central bank announcements looming: #RBA overnight, #RBNZ Thu. ‘On hold’ is expected in both. But check correlation of AUD/NZD and AUD-NZD 2yr swap rate differential – forex may have some catching-up to do.
Factors at the moment stymieing the AUD/NZD pair – often a ‘proxy’ beneficiary of forex flows – to Asia-Pacific:

  •   surge in NZD-buying on the back of recent media reports that China is considering extending foreign currency holdings to include assets denominated in Kiwi
  • Kiwi is expected to continue to benefit from more sovereign demand but the same is true to an even larger degree for AUD especially given close economic links between China and Australia
  • Given positive response in AUD/USD to the announcement, it seems investors perceived the news as indicating stronger Chinese interest for G10 currencies in the Pacific Rim as a whole – i.e. Chinese diversification looks neutral overall
  • AUD/NZD is also a ‘risky’ trade, and we know what’s happened to risk trades over the last few days
  • On the other hand, in keeping with recent price action, AUD/NZD is thought likely to remain resilient in the face of shaky global risk appetite as long as the negative economic surprises are confined to the large developed economies


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