Central bank divergence
A key trading principle in the forex world is to trade a strong currency against a weak currency. This way it is more likely to predict the direction in the pair. A good example of this now occurs in the AUDNZD pair. We have reasons for the continued weakness of the NZD against the AUD.
What is the rationale of the outlook?
The RBNZ confirmed yesterday that it is ready to consider using negative interest rates to stimulate the economy. In its latest policy decision, the RBNZ launched a set of bearish policies. As a first step, it extended its asset purchase program and revealed an openness to negative interest rates. The RBNZ has increased its quantitative easing program (LSAP) to $ 100 billion and extended the duration of the program from 12 to more than 20 months. In addition, the RBNZ expressed its general reference to a lower / negative OCR and a “loan finance program”. Bearish stuff. The impact on the NZD 10-year bond market was revealing
The RBA does not look for negative interest rates. At present, that would be an unlikely solution. For the Reserve Bank, negative interest rates would be a stimulating advantage by putting downward pressure on the Australian dollar, but are likely worried that negative interest rates could cause strain in the financial system. Therefore, the AUD is expected to remain stronger against the NZD. Therefore, buying on a trough makes sense for AUDNZD as long as this central bank divergence remains the same.