BNY’s Head of Markets Macro Strategy Bob Savage highlights a growing divergence between the New Zealand Dollar (NZD) and Australian Dollar (AUD) as markets favor currencies backed by real assets. Despite strong New Zealand commodity prices, NZD is seeing little flow support, while AUD benefits from terms-of-trade gains and reduced hedging. Savage notes that if AUD/NZD divergence feeds into spot, the Reserve Bank of New Zealand (RBNZ) may need to respond via interest rates.

Flows favor AUD over struggling NZD

“In theory, the NZD should be able to benefit from any gains in soft commodities, but there is very little sign of this in our flows. Energy and fuel inputs will affect balance of payments as well, and NZD certainly does not have the underlying nominal or real rates that are a necessary condition for inflows.”

“If anything, there will be fears that the Reserve Bank of New Zealand (RBNZ) will not be able to move sufficiently with inflation risk, which was already in place before recent events. The markets show little interest for NZD for now, but the opposite is true for AUD.”

“These are two very slow-moving currencies in holdings terms (cross-border basis), but we have seen a change from broad convergence at the beginning of February to a spread of 40pp, measured by their current holdings as a percentage of their rolling 12-month averages.”

“The AUD/NZD is material for New Zealand’s trade-weighted indices, and any large moves could impact the outlook for tradables inflation.”

“Asset owners have materially reduced AUD hedges while adding NZD equivalents. The difference in policy rhetoric is sufficient to drive the change, while Australia also stands to benefit far more from the hard/soft commodity-based positive terms-of-trade shock.”

“It seems that markets only have interest in adding to one of the two in exposures, and the choice was clear on multiple levels. If the divergence starts to translate into meaningful spot moves, the RBNZ may also need to look at a response through rates. “

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