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Aussie, NZ Dollars at Risk if RBA and RBNZ Miss Rate Hike Boat

Aussie, NZ Dollars at Risk if RBA and RBNZ Miss Rate Hike Boat

David Cottle, Analyst
What's on this page

Australian and New Zealand Dollar Talking Points:

  • Interest rates have been stuck at record lows in Australia and New Zealand for some time
  • Their central banks both suggest that the next move will be a rise
  • But will the global economy permit that?

Discover what retail foreign exchange traders make of the Australian and New Zealand Dollar’s chances right now at the DailyFX Sentiment Page.

The Australian and New Zealand Dollars both face one huge problem which has weighed them both down very heavily against their big US cousin this year.

Here’s AUD/USD to give you a sense of it…

AUD/USD Daily Chart

Not pretty.

But what can we expect when Federal Reserve has raised interest rates quite aggressively while the Reserve Banks of both Australia and New Zealand remain stuck? Rates in both Pacific countries remain at record lows and will remain there for some time yet. The Aussie and Kiwi Dollars once offered fat interest-rate premiums over the greenback. Now both yield less at base rate and that gap will surely widen further.

Australian futures markets now don’t see any increase at all until well beyond January 2020. Their New Zealand counterparts predict one in September 2019 at the very earliest.

Global Recovery is Already Quite Advanced

But such forecasts can’t exist in a vacuum. Remember that the world has already seen an impressive run of post-crisis economic growth. The US economy has logged 17 straight quarters of economic expansion, and 26 with only a single quarter of contraction.

The S&P 500 index now crows atop an all-time record bull run. How much more can it possibly have to give? Is it rational to expect this charge to continue for the additional year and what more would it need to do before we supposedly get to Australian and New Zealand rate-hike time?

Given apparently endless trade spats, worries about the trajectory of Chinese growth and the simple fact that we’ve already had it quite good for quite a long time, can we really expect the global economy to still be firing by the time those interest rate rises are expected?

And, if it isn’t, are the central banks of Australia and New Zealand really going to hike into what could be a gathering economic storm?

That does not seem likely.

Could the next RBA, RBNZ move really be a rate cut?

It is by no means certain yet but, at current rate-hike pricing it must be at least possible that the central banks of both Australia and New Zealand will miss their chance to raise rates at all for this cycle.

This prospect could weigh on both currencies and cast a little doubt too on the credibility of their central banks. The idea that New Zealand is at least closer to raising rates than Australia might continue to support NZD/USD on the cross trade but, if it should become clear that in fact a cut seems more likely from both central banks, then that bet would be off.

Traders in both currencies might be well advised to ignore local rate pricing and concentrate instead on global growth indicators.

Resources for FX Traders

Whether you’re new to trading or an old hand DailyFX has plenty of resources to help you. There’s our trading sentiment indicator which shows you live how IG clients are positioned right now. We also hold educational and analytical webinars and offer trading guides, with one specifically aimed at those new to foreign exchange markets. There’s also a Bitcoin guide. Be sure to make the most of them all. They were written by our seasoned trading experts and they’re all free.

--- Written by David Cottle, DailyFX Research

Follow David on Twitter @DavidCottleFX or use the Comments section below to get in touch!

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.