For so long, the Australian dollar and New Zealand dollar have traded in near tandem. Now, there has been a huge divergence.
Today, the New Zealand dollar was among the worst-performing currencies while the Australian dollar and Canadian dollar were among the top gainers.
The story is also one of divergence. The Reserve Bank of Australia continues to raise interest rates while the Reserve Bank of New Zealand has held rates unchanged for more than six months.
It’s also clear that New Zealand’s central bank doesn’t want the NZD to appreciate and has made pains to emphasize that its economy isn’t as strong as Australia’s.
Technically, a divergence like the one were are seeing is often a reason to set up trades that benefit from mean reversion. We don’t think that’s the case here. We are emerging from the worst economic crisis in a generation. The recovery has been like a tide that lifts all boats. Now, the market is in a stage where it has grown more discriminating.
So far, the CAD and AUD look like winners. NZD may prove to be a winner as well but so far, it’s lagging and expect the performance of the NZD to continue to reflect that.