The Australian dollar and New Zealand dollar both surged on Monday thanks to a new-found demand for risky, high-yielding assets.
While the Reserve Bank of Australia and Reserve Bank of New Zealand are both expected to cut rates by at least 100bps over the next 12 months, the central banks still hold some of the highest benchmarks in the G10 (RBA: 7.00 percent, RBNZ: 8:00 percent). However, commodity prices – which hold a strong correlation with the Aussie – ended the day very little changed. Traders shouldn’t brush off that correlation though. If the market’s attention turns away from Fannie Mae/Freddie Mac and back to commodities, oil and gold could become the big driver of the commodity dollars once again. Meanwhile, event risk will pick up significantly for the comm bloc this week. The biggest by far will be the Reserve Bank of New Zealand’s rate decision, since they are expected to cut rates for the second consecutive month by 25bps to 7.75 percent, according to 13 of the 14 economists polled by Bloomberg News. It is telling, though, that the last economist actually anticipates a 50bps cut. The key to the New Zealand dollar’s reaction, though, will be RBNZ Governor Bollard’s post-meeting commentary. Credit Suisse overnight index swaps are already pricing in nearly 150bps worth of rate cuts within the next 12 months, but if Mr. Bollard mimics his dovish policy statement from July, this sentiment will be exacerbated and the New Zealand dollar will likely plunge. Meanwhile, New Zealand retail sales, Australian retail sales, and the Australian net employment change are all likely to be negative fundamental factors for Kiwi and Aussie. Related article: Australian Dollar Shows Signs of a Turn.
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