AUDNZD Continues to Decline as Economies Diverge

by on December 17, 2013 6:05 am GMT

The AUDNZD has been a successful carry trade as it continues down the path of five-year lows with the Reserve Bank of Australia (RBA) reiterating that further monetary loosening is still a viable option. Glenn Stevens, the RBA Governor, has continued to tell financial markets that the Australian dollar is still “uncomfortably” and “historically” high.

The Australian budget deficit is expected to increase to $47 billion AUD through to June, while neighboring New Zealand is forecasting a budget surplus of $86 million NZD through to 2015 and doubling that surplus by 2016. “There’s a big contrast between Australia and New Zealand at the moment. The RBA minutes and New Zealand budget update reinforced that,” said Jonathan Cavenagh, a FX strategist at Westpac Banking Corp.

Traders are speculating that the countries’ exchange-rate will reach parity as the two economies diverge, albeit the Australian economy is much larger and the lack of growth is amplified. Cavenagh believes that “we’re probably going to trend towards the NZ$1.05-NZ$1.06 region” within the next few months.

The RBA makes clear that to “close off the possibility of reducing it further should that be appropriate to support sustainable growth in economic activity.” Stevens will be testifying to the House of Representatives Economic Committee tomorrow after last week saying that 85 cents per dollar is a comfortable range for the Australian dollar.

The Australian dollar has declined 12 percent, the second most behind the yen in developed economy currencies. In comparison, the New Zealand dollar has appreciated by 3.6 percent.