Giles Coghlan LLB, Lth, MA
Financial Source
Central bank divergence
One of the first principles to teach aspiring FX traders is trading a strong currency against a weak currency. In this way, it is easier to determine direction. A great example of this is now occurring in the AUDNZD pair. We have reasons for continued NZD weakness against the AUD. This is due to a divergence in policy between the RBA and the RBNZ.
A dovish RBNZ
The RBNZ yesterday confirmed that it is prepared to use negative interest rates to boost the economy. This is a confirmation of the latest policy decisions from the RBNZ. In that decision, the RBNZ launched a set of bearish monetary policies. Firstly, the RBNZ increased their quantitative easing (LSAP) programme to $100bn. Secondly, they extended the length of the programme from 12 to over 20+ months. Thirdly, the RBNZ expressed their general reference for a lower /negative OCR and a ‘Funding for Lending Programme'. This is Bearish stuff. The impact in the NZD 10Y bond market was telling. A falling bond yield is indicative of lower interest rates.
A less bearish RBA
The RBA, on the other hand, is not actively pursuing negative interest rates. At present that would be an unlikely course of action. Yes, the Reserve Bank of Australia knows that negative interest rates would be a stimulatory benefit by putting downward pressure on the Australian dollar. However, they are probably wary that negative interest rates can cause unwanted stresses in the financial system.
AUDNZD upside
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.
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Editors’ Picks
EUR/USD meets initial support around 1.1800
EUR/USD remains on the back foot, although it has managed to reverse the initial strong pullback toward the 1.1800 region and regain some balance, hovering around the 1.1850 zone as the NA session draws to a close on Tuesday. Moving forward, market participants will now shift their attention to the release of the FOMC Minutes and US hard data on Wednesday.
GBP/USD bounces off lows, retargets 1.3550
After bottoming out just below the 1.3500 yardstick, GBP/USD now gathers some fresh bids and advances to the 1.3530-1.3540 band in the latter part of Tuesday’s session. Cable’s recovery comes as the Greenback surrenders part of its advance, although it keeps the bullish bias well in place for the day.
USD/JPY is looking for direction around 153.00 with key US data in focus
USD/JPY reversal from 153.70 has been contained above 152.70 on Tuesday. Major currencies are trading within narrow ranges amid thin trading volumes. Investors await the release of the US GDP and PCE Inflation figures to make decisions.
Editors’ Picks
NZD/USD: All eyes on RBNZ guidance and new Governor Breman's debut
NZD/USD opened Tuesday at 0.60344, reached a high of 0.60520 and a low of 0.60044, and closed at 0.60480, down 0.22%. The pair is holding well above the 50-day Exponential Moving Average at 0.59041 and the 200-day EMA at 0.58545, with both averages rising and spaced roughly 50 pips apart, confirming the underlying bullish trend that began from the January low of 0.57110.
AUD/USD extends the bounce, focus back to 0.7100
AUD/USD adds to Monday’s optimism and approaches the key 0.7100 barrier ahead of the opening bell in Asia. The pair’s positive performance comes as investors keep assessing the hawkish tilt from the RBA Minutes and despite humble gains in the Greenback. Next in Oz will be the Westpac Leading Index and the Wage Price Index.
Gold remains offered below $5,000
Gold stays on the defensive on Tuesday, receding to the sub-$5,000 region per troy ounce on the back of the persistent move higher in the Greenback. The precious metal’s decline is also underpinned by the modest uptick in US Treasury yields across the spectrum.
RBNZ set to pause interest-rate easing cycle as new Governor Breman faces firm inflation
The Reserve Bank of New Zealand remains on track to maintain the Official Cash Rate at 2.25% after concluding its first monetary policy meeting of this year on Wednesday.
UK jobs market weakens, bolstering rate cut hopes
In the UK, the latest jobs report made for difficult reading. Nonetheless, this represents yet another reminder for the Bank of England that they need to act swiftly given the collapse in inflation expected over the coming months.
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