fxmatters

The traditional carry trade – the NZD/JPY and AUD/JPY – has kicked in again in the last couple of weeks, in line with another surge in global share prices and the recent RBA tightening. Even NZ news added to the pressure with inflation running faster than expected (but not high enough to concern the RBNZ).

In simple terms the driving force appears to be the huge US stimulus. Historically money creation on this scale has created inflation. In recent decades the inflation pressure has tended to come through in asset prices. There in lies the quandary. The global authorities know that facilitating the asset bubbles of earlier years was a mistake, so surely they will respond this time sooner i.e. tighten monetary policy.

Some are doing this already e.g. the RBA. Others such as the BOE are hinting that they are coming round to this thinking. Comments from US Fed Chairman Bernanke will be listened to closely this week.

In the meantime the global good-news story will continue, strong Chinese growth likely to be reported this week and probably higher than expected Australian inflation next week judging by the NZ out-turn.

This all adds to short-term upward pressure on the NZD (except against the AUD and CAD, and maybe excepting the GBP now) but the risk of a sharp turnaround remains.