fxmatters

This week there will be plenty of news from Australia. The week started with another fiscal stimulus. Tomorrow the RBA is expected to add to the monetary stimulus with a 0.75% cut to provide a 4.5% cash rate. Wednesday we will probably learn that the Australian economy is still growing – just! – while a series of other data released during the week will show likewise (see Calendar). All in all, the Australian economy is coping reasonably well with the global shock – if only the rest of the world were the same.

As it turns out, there was a mood change last week in global markets. The US S&P500 Index was up 12% (and a few local stocks ended with double-digit gains). The US government lobbed even more funds into the banking sector. The Chinese cut rates again. The British and Europeans will cut rates this week.

These changes have the potential to create a sharp rebound in currency markets. Not only can the nascent optimism prove catchy, but rate cuts often have perverse impacts on exchange rates, after the fact. And just as the AUD was to the fore of the currency drop, it is likely to be to the fore of any rebound. As always, nothing is certain about the future but the odds are building for a stronger AUD, and hence a generally stronger NZD versus other currencies as the NZD follows, albeit reluctantly.

The reluctance comes from the NZ economy in recession and the RBNZ likely to narrow the gap – actual and anticipated (see Interest Rate Futures) – between trans-Tasman interest rates this week: a lower NZD/AUD appears in store.