AUD/NZD: Having common denominators - Rabobank

Jane Foley, Research Analyst at Rabobank, suggests as far as NZD and AUD are concerned, there are a number of common denominators mostly obviously in the form of China which led to their recent performance.  

Key Quotes

If President-elect Trump follows through on his protectionist pledges, the impact would be far reaching.  The cheap products from countries such as Mexico and China which are stocking the shelves of US stores have, in some cases, a supply chain that passes through several other nations.”

“Using IMF data for 2014, both Australian and New Zealand are within the top 30 countries with the largest share of export dependence on China.  Within the OECD, Australia and New Zealand take top and fourth place respectively in terms of share of exports relative to the total.  This share has risen dramatically since the start of the century.  For Australia, as the importance of China as a trading partner grew, so did the composition of exports with minerals and fuels comprising 50.6% of total exports in 2013-2014 (according to Australian government data).   At the same time, Australia has seen a sharp rise in investment from China since 2007.  Initially most of this money flowed into Australia’s resource sector but in 2014 and 2015 there was significant diversification into sectors such as real estate, finance, agriculture and health care.  This change reflects not just the end of Australia’s mining investing boom but also diversification among Chinese consumers.  If Trump follows through on his protectionist pledges, the impact on a country such as Australia through its links with China could be far reaching.”  

“Measured since the end of last year, both the AUD and the NZD have been trending higher vs the CNY.  This trend is a contributing factor behind the low levels of inflation being experienced in both counties.  Last week the RBNZ cut interest rates by 25 bps and remarked that “the exchange rate remains higher than is sustainable for balanced economic growth and, together with low global inflation, continues to generate negative inflation in the tradables sector. A decline in the exchange rate is needed”.  Although RBA Governor Lowe has taken a more pragmatic approach to low inflation, the potential risks stemming from a Trump Presidency combined with the drop in Australian wage growth to an all time of 1.9% y/y in Q3 suggest that the RBA could still ease again.  Although we see some potential for the recent broad-based rise in the USD to correct, we have lowered our 12 mth forecasts for AUD/USD and NZD/USD to 0.72 and 0.69 respectively.”