##{"id":59058,"date":"2011-10-27T11:33:26","date_gmt":"2011-10-27T00:33:26","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2011\/10\/27\/cba-targets-aussiekiwi-1-27\/"},"modified":"2011-10-27T11:33:26","modified_gmt":"2011-10-27T00:33:26","slug":"cba-targets-aussiekiwi-1-27","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2011\/10\/27\/cba-targets-aussiekiwi-1-27\/","title":{"rendered":"CBA Targets Aussie\/Kiwi 1.27"},"content":{"rendered":"

\n\t– Risk aversion, interest rate differentials drive AUD\/NZD<\/span> exchange rate
\n\t– CBA<\/span> expects current interest rate spread will narrow
\n\t– Bank forecasting a move to an AUD\/NZD<\/span> rate of 1.2700<\/strong><\/p>\n

\n\tBy Chris Shaw<\/p>\n

\n\tAs Commonwealth Bank points out, the two drivers of the AUD\/NZD<\/span> exchange rate are risk aversion and Australian-New Zealand interest rate differentials. Any episodes of risk aversion usually drive the AUD\/NZD<\/span> rate lower, largely because the Australian dollar is the more heavily traded of the two currencies.<\/p>\n

\n\tThis correlation also tends to work in reverse, CBA<\/span> FX economist Chris Tennent-Brown<\/span> noting the Australian dollar has outperformed the New Zealand dollar over the past three weeks as risk appetites have improved.<\/p>\n

\n\tIn terms of interest rate differentials, the Australian-New Zealand two-year swap spread has widened by 40-basis points to 123-basis points since a mid-September low. In the same period, the AUD\/NZD<\/span> exchange rate has risen by around 6% from 1.2363 to a current level of around 1.3000.<\/p>\n

\n\tThe widening in the interest rate spread reflects a recent improvement in Australian economic data at the same time as New Zealand data has softened. As examples, Tennent-Brown<\/span> points out unemployment in Australia has fallen to 5.2%, while Q2<\/span> GDP growth in New Zealand was a lower than expected 0.1%.<\/p>\n

\n\tInflation in Australia for the September quarter was also weaker than expected, the underlying rate rising by just 0.3% in quarter-on-quarter terms. For Tennent-Brown<\/span> this suggests any Reserve Bank of Australia (RBA<\/span>) decision on interest rates next month now depends heavily on whether or not the Europeans can deliver a credible rescue package for their financial system.<\/p>\n

\n\tIn New Zealand the expectation remains for rate hikes by the end of 2012, but in Tennent-Brown's<\/span> view the recent slowing in economic data means the risk is rate hikes come later and any tightening cycle is more gradual than had previously been expected.<\/p>\n

\n\tWhen market risk appetite improves Tennent-Brown<\/span> notes the New Zealand market has greater scope for interest rate tightening. This is because at present rates in New Zealand are at “emergency levels” of 2.5% while the cash rate in Australia is slightly restrictive at 4.75%.<\/p>\n

\n\tOn a six-month time frame Tennent-Brown<\/span> suggests if the level of risk aversion in the market eases further there is a risk rates rise in New Zealand but little chance of a similar move in Australia. But if risk aversion increases the RBA<\/span> is the more likely of the two central banks to cut rates.<\/p>\n

\n\tWhile either of the above scenarios could eventuate, in both cases the Australian-New Zealand interest rate spread is likely to narrow rather than widen. To reflect this view, Tennent-Brown<\/span> expects the AUD\/NZD<\/span> exchange rate is likely to move to a rate of around 1.2700. <\/p>\n

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