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Central Bank Policy Divergence Highlights Possible AUD/USD Reversal

Central Bank Policy Divergence Highlights Possible AUD/USD Reversal

Richard Snow, Analyst

RBA, RBNZ Point of Departure?

The October 4th and 5th Reserve Bank of Australia (RBA) and Reserve Bank of New Zealand (RBNZ) meetings appear to have set the scene for what appears like diverging central bank policy as the RBA’s dovish 25 basis point hike and accompanying message shocked markets.

Reserve Bank of Australia (RBA) 4 October Meeting

Earlier this month the RBA defied estimates of a 5th consecutive 50 bps hike in the RBA policy rate by deciding on a 25 basis point hike instead, citing the fast pace of rate hikes to date over a short period of time. The rate setting committee cited that “medium term inflation expectations remain well anchored” – at a time when other major central banks are witnessing signs of stickier inflation over the medium term - and that the Board remains resolute to returning inflation back to target. It’s important to know that inflation in Australia at 4.9% is far lower than its counterparts like the US (8.3%) and the EU (10%), which could possibly allow the Bank some leeway in its rate hiking cycle.

Australian Policy Rate Since Hikes Began in May 2022

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Source: Refinitiv

Reserve Bank of New Zealand (RBNZ) 5 October Meeting

The RBNZ, in contrast, provided an aggressive stance to lowering inflation, in line with major central banks, as it hiked by 50 bps to increase the interest rate differential between the two Australasian nations.

Some of the main points of the meeting included the fact that members considered not only 50 bps but also 75 bps, showing the committee’s determination to get inflation back to target and that members agreed that larger increases now would reduce the likelihood of higher peak OCR being required. Productivity was also assessed to be strained due to a tight labor market, meaning the Bank essentially has more room to hike rates before unemployment begins to feel the effects.

RNNZ Cash Rate Since Hiking in October 2021

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Source: Refinitiv

AUD/NZD Charts

The daily AUD/NZD is an appropriate chart to assess possible divergences as the sizeable influence of China is removed. Both economies depend on China to a sizeable degree as China is a large purchaser of Australian and New Zealand commodities. This leaves us with a better picture of monetary dynamics that can be seen playing out.

Price action tests not one but two crucial areas of support: the long term trendline support and the horizontal level of support with the intersection of these circled in purple. Thus far breaks of the trendline proved to be short-lived as price action closed above the ascending trendline each time. A possible break of the trendline is supported by the apparent divergence of monetary policy as the RBNZ is anticipated to hike at its current rate of 50 bps in November while markets only price in 17 bps for the November RBA meeting.

AUD/NZD Daily Chart

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Source: TradingView, Chart prepared by Richard Snow

The 4-hour chart reveals a level of support below the zone of support at 1.1122 where price action stalled in September. Therefore, it would not be unusual to see future price action stall at the same level and possibly retest the zone of support turned resistance (red rectangle). Essentially, it is constructive to look for a retest of the major level of resistance and subsequent bearish momentum before considering the bearish breakout play.

AUD/NZD 4-Hour Chart

image4.png

Source: TradingView, Chart prepared by Richard Snow

--- Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX

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

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