Your Down-Under Trading Plan
Hungry for a trading idea that has nothing to do with the mess in Europe? Here's one that's a world away.
New Zealand cut interest rates after the Christchurch earthquake, and many investors have been expecting a reversal later this year. But Sue Trinh, a senior currency strategist at Royal Bank of Canada in Hong Kong, says don't hold your breath: that rate increase isn't likely until the second half of 2012.
What's changed? New Zealanders' borrowing behavior, mainly. Trinh says in a note to clients that unlike a few years ago, most New Zealand mortgages are now adjustable-rate. That means an interest-rate hike would have a relatively immediate effect - "faster policy traction," in her words. Also, banks' funding costs are high, so they may just raise the interest rates they charge even without a move by the central bank.
The bottom line: "With greater monetary policy traction and lower bank lending margins amid elevated funding costs, the RBNZ will be apt to proceed cautiously in lifting rates," Trinh says. And that's a problem for the New Zealand dollar.
Meanwhile, the Australian dollar is facing the reverse situation: the market seems to have priced in interest rate cuts that Trinh does not expect to materialize - and today's jobs report certainly doesn't up the odds.
Trinh recommends buying the Australian dollar against the New Zealand dollar at current levels, and she thinks it could reach 1.32 by the end of the first quarter of 2012.
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