There’s no doubt we’re in a widespread recovery phase from the global pandemic. With the exception of a handful of tail risks including viral variants, public adherence and seasonality, the global economy is rather steadfast in its pursuit of a post-Covid world. In accordance with that recovery comes a phase of increased risk appetite alongside the donning of rose tinted spectacles. In foreign exchange markets that means a preference for those currencies harder hit by the pandemic and those likely to be closely wired into the global economy and trade in particular, who are likely to benefit for shifting conditions first. Those economies identified as having the most direct connection to the metronome of the global economy are typically those specialised in the export of primary materials. Before demand spreads to financials and technology, primary resources including hard and soft commodities are likely to have already felt increased demand. The very same factors that made such markets react so strongly to the outbreak of the pandemic are those same characteristics that lead them out first.
Two key candidate currencies to benefit from the emergence to a post-pandemic world are the Australian Dollar (AUD) and the New Zealand Dollar (NZD). Year to date the AUDNZD pair is relatively flat showing momentum in favour of AUD in Q1 before normalising in favour of the Kiwi Dollar. The correction in NZD has been a significant factor in markets. So who will the winner between these two G10 currencies be in the months ahead?
Whilst momentum should from a pro-cyclical argument favour both currencies to similar degrees, it is the shift in stance of the New Zealand central bank towards the normalisation of monetary policy that is giving NZD the edge. In fact, positioning data disclosing the orientation of the speculative portion of the FX market shows investors still long of NZD as they have been for most of the year to date, to the tune of 8%. In contrast, the AUD, whose governing monetary authority is still focussed on providing supportive and loose monetary conditions has a negative open market interest of -12% showing speculators activity positioned against the Aussie Dollar. The forward market is emphasising and exacerbating the appeal of NZD over AUD with the forward curve having steepened significantly. Concerns over Iron Ore prices and market conditions have also weighed upon demand for the Aussie Dollar.
The temporary suspension of the travel corridor between Australia and New Zealand sapped support for both currencies as the headlines provided a timely reminder of the fragility of the path towards normalisation. Provided the Reserve Bank of Australia maintains it’s tone in contrast to the RBNZ, the bias in favour of the Kiwi Dollar should encourage stronger NZD prices across the board.
Discussion and Analysis by Charles Porter
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