Connect with us

Stock Markets

AUD/NZD: Likely To Rise Into 2021 As Economic Risks Make The AUD Less Risky

Published

on


The AUD/NZD currency pair, which expresses the value of the Australian dollar in terms of the New Zealand dollar, is trading far above parity (1.00) which was found earlier this year following a collapse in risk sentiment. As flows out of risk assets precipitated declines in global equities and energy markets, NZD initially favored over AUD. Yet since March 2020 (the month in which parity was found), AUD/NZD has strengthened considerably. Yet the pair is most recently registering lower highs and lower lows (see chart below).

AUD/NZD Price Action in 2020(Source: TradingView. The same applies to price charts presented hereafter.)

Both Australia and New Zealand have cut their short-term rates this year. The Reserve Bank of Australia has cut its short-term target from +0.75% to +0.25%, while the Reserve Bank of New Zealand has similarly cut its short-term rate from an albeit higher starting point of +1.00% to +0.25%. The chart below includes the 10-year government bond yield spread for AUD/NZD (the red line) which appears to be steering alongside the exchange rate closely.

AUD/NZD versus 10-year Bond Yield SpreadInterestingly the 10-year bond yield spread is positive, in spite of these two countries’ matching central bank rates. The bond market is therefore apparently favoring a stronger AUD/NZD rate (most recently since around July 2020), although the spread has been as high as 40-50 basis points in favor of AUD on a couple of occasions earlier this year.

AUD is possibly the riskier of the two currencies, hence why it tends to benefit a little more from positive risk sentiment, and find more downside volatility than NZD when risk sentiment turns negative. The riskier nature stems from the fact that Australia, as reported by the OEC, is less sophisticated than New Zealand‘s economy (ranking 73 out of 137 countries for economic complexity; New Zealand ranks at 49 out of 137). A key reason for this lesser complexity is that Australia’s industrial and export “portfolio” is more concentrated, primarily in coal, iron ore, petroleum gas, gold and aluminium. New Zealand is less “energy oriented”; top commodities include milk, meat, butter, and wood.

One factor that would support AUD over NZD, however, is the economic size of Australia. While New Zealand GDP was US$205 billion in 2018, Australian GDP hit $US1.43 trillion (about 7x the size of New Zealand). A larger economy would typically amplify FX moves, as the currencies of smaller economies are usually less liquid (all else equal). The most liquid currencies include USD, EUR and JPY, for example (see here for a breakdown). Yet the fact that AUD seems to be preferenced over NZD during periods of positive risk sentiment would suggest that economic complexity probably overrides any effect that the size of an economy (or its FX market) has on FX prices.

Both Australia and New Zealand are net importers of crude oil products, hence lower oil prices tends to benefit these nations’ currencies (AUD and NZD). This is partially evidenced by the chart below, which shows that the terms of trade (the ratio between a country’s export and import prices) shot higher earlier this year. As oil prices have rebounded somewhat, we can probably expect to see the upside trajectory weaken for these countries in the medium term.

AUD/NZD Terms of Trade Comparison(Source: Trading Economics)

The two countries appear roughly “neck and neck” on the chart above. Both AUD and NZD are both considered commodity currencies after all, and they do usually trade in a range with each other. However, this crisis should be considered for its uniqueness; the crisis of 2020 has been brought about by COVID-19, which has resulted in many government restrictions on travel. Consumers are also less interested in travelling internationally themselves. As a result, tourist arrivals to Australia and New Zealand have crashed.

AUD/NZD Tourist Arrivals(Source: Trading Economics)

Remember, Australia is the larger economy. Australia might be less sophisticated, but in terms of this particular crisis, the greater relative dependency of New Zealand on tourism actually makes the latter country “less sophisticated” (less diversified) in this context. Data collected by Knoema suggests that, per 2018 figures, the tourism industry contributed 10.8% to Australian GDP, which is significant but not quite as much as New Zealand’s rate of 17.9%. Continued restrictions and/or lower consumer demand for international tourism places at least a mild bias on AUD/NZD upside.

A longer-term model which also indirectly considers the effects of international trade is Purchasing Power Parity; a measure of the relative purchasing powers of different currencies. Using the OECD’s PPP model data, I construct the chart below to calculate the rolling annual fair value estimate (the red line, center). The upper and lower bands illustrate prices that are 30% above and below the annual fair value estimate, through to 2019 (the most recent estimate).

AUD/NZD PPP-Implied Fair Value(Sources: Investing.com and OECD)

From the chart above it would appear that AUD/NZD has traded at a modest surplus to fair value for many years. This trend may continue, although it is also possible that an out-performance of Australia in the short- to medium-term could increase the “AUD premium” (creating further upside against NZD), which would support the bond market’s long-term vote (as we saw from 10-year government bond yields).

Changes in the real yield can help to gauge where the bias might be in the short- to medium-term. In the table below we adjust this year’s changes in the short-term central bank rates of AUD and NZD for year-over-year inflation. Australian inflation has collapsed into deflation (as of Q2 2020), while inflation in New Zealand has not changed by nearly as much. This is rather surprising, and while the inflation in New Zealand might be driven by “cost-push” factors, it is nonetheless rather steady. Australian prices fell in Q2 2020 for the first time since Q3 1997; while certain costs rose (including food prices), several other areas saw falling prices, including transport (-7.5%).

AUD/NZD Real Yield Spread ChangeTherefore, despite the short-term Australian interest rate falling by less than New Zealand’s, the inflation-adjusted “real yield” (implied by central bank rates) has actually massively improved (by almost 2%) in favor of AUD/NZD upside. This is one of the starker shifts across the FX world, and would seem to support a stronger AUD versus NZD. The AUD/NZD exchange rate is still trading about 3% above its January 2020 opening price, and hence the market does seem to reflect this bias (in spite of the pair making lower highs and lows, most recently).

I don’t believe the fact that AUD/NZD is probably overvalued from a PPP basis (as illustrated in the penultimate chart, above) as a significant hindrance to further AUD/NZD upside. NZD risks seem higher, while Australian inflation is low (negative in Q2). Provided rates do not move in the medium term (and they are probably unlikely to, in both AU and NZ), the bond market’s long-term vote for AUD/NZD upside is probably well founded. That also applies in the shorter term, considering the NZ’s greater dependence on tourism, and the fact that Q2 2020 GDP growth (year-over-year) was a horrible -12.4% in New Zealand, as compared to Australia‘s less aggressive contraction of -6.3%.

All factors considered, I believe that while AUD/NZD may possibly try to reprice lower in the short term, in the medium term the recent upside will probably prove well-founded. It is difficult to be optimistic on either currency in isolation due to the surrounding risks to commodity currencies in a world where macroeconomic uncertainty is so high. Yet I would have to favor AUD over NZD as we move into 2021.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





Source link

Continue Reading
Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

Stock Markets

Dow Jumps on Cyclicals Boost as Pelosi Touts Stimulus Deal Optimism By Investing.com

Published

on

By


© Reuters

By Yasin Ebrahim

Investing.com – The Dow rose Tuesday as economy-linked cyclical stocks climbed after House Speaker Nancy Pelosi touted optimism over getting a deal on stimulus, though said differences on key issues remain ahead of today’s deadline.

The rose 0.92%, or 159 points. The was up 1.07%, while the added 1.01%.

Pelosi suggested progress had been made with the White House on recent stimulus talks and she was hopeful a deal could be brokered by the end of the day. The house speaker conceded, however, that state and local money along with business liability remained sticking points.

Both renewed talks at 3PM ET today, after negotiations a day earlier helped chip away at differences.

The remarks firmed up expectations a deal could be in the offing after White House economic advisor Larry Kudlow signaled uncertainty.

Stocks tied to the economy like industrials, materials and financials racked up gains intraday.

Financials got a boost from rising banking stocks, with Goldman Sachs (NYSE:) in the spotlight, up more than 2%, after the latter was reported to have reached a deal with the U.S. Department of Justice to pay over $2 billion for its role in the 1MDB scandal.

JPMorgan Chase (NYSE:) and Wells Fargo (NYSE:) were up more than 1%, while Citigroup (NYSE:) added more than 2%.

In tech, meanwhile, further signs of a government crackdown on the monopoly power of large cap tech did little to dent investor sentiment on the sector.

The U.S. government filed an antitrust lawsuit against Google on allegations it had violated competition law to preserve its monopoly over internet searches and online advertising.

Google-parent Alphabet (NASDAQ: rose more than 2%, while Facebook (NASDAQ:), Apple (NASDAQ:) and Microsoft (NASDAQ:). Amazon.com (NASDAQ:) jumped 3%.

Elsewhere in tech, International Business Machines (NYSE:) fell 6% after reporting a third straight quarterly decline in revenue and keeping its guidance sidelined amid uncertainty from the ongoing pandemic.

Procter & Gamble (NYSE:) was up more than 0.5% after raising its guidance and reporting quarterly results that topped Wall Street estimates in the wake of a pandemic-led boost to demand for its household products.

In other news, cash-strapped move chain AMC Entertainment (NYSE:) slumped more than 12% after warning of possible bankruptcy as it continues to seek additional liquidity to plug the financial hole as a result of the pandemic.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.





Source link

Continue Reading

Stock Markets

Canada working on possible aid for the airlines and travel sector, says finance minister By Reuters

Published

on

By


© Reuters. Canada’s Deputy Prime Minister and Minister of Finance Chrystia Freeland takes part in a news conference on Parliament Hill in Ottawa

OTTAWA (Reuters) – The Canadian government is very aware of the challenges facing airlines and the travel sector during the coronavirus pandemic and is working on possible aid, Finance Minister Chrystia Freeland said on Tuesday.

Freeland said she had spoken to the heads of Canada’s major airlines and unions last week but did not give details. Carriers and travel industry executives have repeatedly urged Ottawa for assistance as passenger numbers slump.

“We are obviously aware of the particular challenges that the travel sector, the airlines are facing right now,” she told a news conference when asked about an aid package.

“It’s definitely an issue we are looking at closely and working on,” she said.

Airlines have already received more than C$1 billion ($763 million) from a wage subsidy program that Ottawa introduced to help businesses deal with the pandemic, she said.

Intergovernmental Affairs Minister Dominic LeBlanc told CTV on Sunday that Ottawa might take a stake in major airlines such as Air Canada and WestJet Airlines. Both carriers have suspended dozens of routes.

The Canadian branch of the International Association of Machinists and Aerospace Workers on Tuesday urged Freeland to consider partially or fully nationalizing Air Canada.

Earlier this month major labor unions said the aviation sector would suffer permanent damage unless Ottawa provided a C$7 billion 10-year low-interest loan to offset the effects of the pandemic.

($1=1.3113 Canadian dollars)

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.





Source link

Continue Reading

Stock Markets

Denmark stocks lower at close of trade; OMX Copenhagen 20 down 0.14% By Investing.com

Published

on

By


© Reuters. Denmark stocks lower at close of trade; OMX Copenhagen 20 down 0.14%

Investing.com – Denmark stocks were lower after the close on Tuesday, as losses in the , and sectors led shares lower.

At the close in Copenhagen, the declined 0.14%.

The best performers of the session on the were William Demant Holding A/S (CSE:), which rose 5.15% or 10.5 points to trade at 214.5 at the close. Meanwhile, Danske Bank A/S (CSE:) added 1.68% or 1.6 points to end at 94.5 and Novozymes A/S B (CSE:) was up 1.49% or 6.1 points to 414.8 in late trade.

The worst performers of the session were Genmab (CSE:), which fell 1.99% or 46.0 points to trade at 2260.0 at the close. Oersted A/S (CSE:) declined 1.62% or 16.50 points to end at 1004.50 and AP Moeller – Maersk A/S B (CSE:) was down 1.49% or 160 points to 10550.

Falling stocks outnumbered advancing ones on the Copenhagen Stock Exchange by 80 to 60 and 11 ended unchanged.

Crude oil for December delivery was up 0.54% or 0.22 to $41.28 a barrel. Elsewhere in commodities trading, Brent oil for delivery in December rose 0.33% or 0.14 to hit $42.76 a barrel, while the December Gold Futures contract rose 0.08% or 1.45 to trade at $1913.15 a troy ounce.

USD/DKK was down 0.45% to 6.2929, while EUR/DKK rose 0.07% to 7.4429.

The US Dollar Index Futures was down 0.38% at 93.073.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.





Source link

Continue Reading

Trending

Copyright © 2017 Zox News Theme.