New Zealand dollar preferred to Australian dollar over at Bank of America Merrill Lynch

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Category: Australian Dollar News

Written by Rob Samson

"A further rally in risky assets could see the oversold NZD rally more than the AUD" - Adarsh Sinha at BofA Merrill Lynch.

The New Zealand dollar (Currency:NZD) is favoured ahead of its Australian counterpart over at Bank of America Merrill Lynch Global Research.

There are two issues to consider: Interest rate differentials and risk-on trade conditions.



With a positive outcome to the Greek elections risk-associated assets will now have greater scope to rally.

A note entitled Revisiting AUD/NZD by Adarsh Sinha at BofA Merrill Lynch says, "the NZD remains the worst-performing currency and by a margin of over 1ppt more relative to its estimated decline than the AUD. A further rally in risky assets could see the oversold NZD rally more than the AUD."

Sinha also cites the likelihood that New Zealand will not cut interest rates in the future. In the world of FX, central bank interest rate cuts are a negative for the currency in question. 

Thus, signs that New Zealand will not cut rates is a NZD positive. "The RBNZ statement last week was somewhat less dovish than its previous communication and certainly relative to market pricing," says Sinha.

The RBNZ said, "it remains appropriate for monetary policy to remain stimulatory” – a more neutral stance than its prior “need to reassess the outlook for monetary policy settings” if the exchange rate remained strong.

"The 3% depreciation in the NZD trade-weighted index was among the reasons we expected the RBNZ to strike a less dovish tone, but we thought it would maintain the “two-way” risk for the OCR by switching the conditionality from the exchange rate to global conditions," says Sinha.

According to BofA, the market pricing of rate cuts is primarily related to external risks, so it has not changed very much following the RBNZ meeting.

However, the RBNZ is more constrained by its "emergency" policy setting following the earthquake, which reduces its capacity to credibly deliver on this market pricing, particularly given its latest projections, unless of course the European situation worsens dramatically.

Sinha recommends selling AUD-NZD with a target price at 1.2550 with a 1.2990 stop/loss.