Giles Coghlan LLB, Lth, MA
Financial Source
Next week we have the Reserve Bank of Australia and the Reserve Bank of New Zealand meetings. The go-to currency pair for trading any divergence between the RBA and the RBNZ is the AUDNZD currency pair. So, there may be some opportunities ahead. The RBA meets early Tuesday morning on the 4th of April at 05:30 UK time and the RBNZ meets early Wednesday morning at 03:00 UK time. Here are the expectations for the two banks, but what we are looking for is a divergence away from these expectations to create a possible opportunity for trading the AUDNZD pair.
RBA: Expected to hold rates
The RBA is expected to hold rates next week with only a 13% chance seen for a hike of 15bps. The latest inflation print for Australia shows disinflationary forces in play for the RBA with monthly CPI falling to 6.8% from 7.1%. However, the headline inflation print is still showing signs of rising. The January print was at 7.8% y/y, so the risk here is that the RBA feels the need to hike.
However, whether it hikes or not the most important aspect will be its forward guidance. Is it at peak rates now or does it foresee even higher interest rates to come? For context, the March minutes saw the RBA willing to consider a pause in rates for April. So, a commitment to ongoing rate hikes would be a bullish surprise which would lift the AUDNZD pair.
RBNZ: Expected to hike rates
The RBNZ has short-term interest rate markets pricing in nearly 100% chance of a 25 bps rate hike to 5%. See the probability from Financial Source’s very helpful rate tracker:
The same tracker sees the terminal rate for the RBNZ at 5.25% with rate cuts for the second half of the year. Core inflation is proving sticky and is still rising. The print for January was 7.4% year on year and you can see the steady gains are not showing signs of slowing.
This high inflation environment will keep the RBNZ hiking. That is what the market expects. Once again, like the RBA, look for the forward guidance. If the RBNZ gives an indication that it is at terminal rate and that it will consider pausing then the NZD should weaken. This would open up an AUDNZD upside bias.
Summary
Look for a divergence in policy between the RBA and the RBNZ for a possible swing trade once both central banks have met. Key levels are marked below to define and limit risk.
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