Powderhounds considering their next overseas ski trip may want to look at New Zealand, with the Kiwi dollar set to fall further against its Australian counterpart in the months ahead.
That’s the view of CBA’s foreign exchange and interest rate strategy team, who believe the AUD/NZD cross will likely lift towards 1.12 on divergent monetary policy stances between the RBNZ and RBA.
Here’s the basis for their call:
“The AUD/NZD exchange rate is particularly sensitive to the Australia-New Zealand two-year swap spread. Over the course of this year, both the RBA and the RBNZ have cut interest rates, generating additional volatility into the swap spread. The Australia-New Zealand two-year swap spread has narrowed to -102bpts, its highest (narrowest) level in more than a year. The RBNZ is set to deliver another near-term interest rate cut and there is a risk the RBA cuts interest rates again before the year is out; AUD/NZD is set for some volatility.
In our view, a follow-up near-term RBNZ rate cut would generate a further narrowing of the swap spread and a lift in AUD/NZD to 1.1200“.
The relationship between the 2-year swap rate differentials and the AUD/NZD exchange rate is shown below.
If the CBA’s call is correct, it means a New Zealand snow adventure could be up to 1.3% cheaper in the months ahead, based on today’s level of 1.1055.
Given the Aussie has already increased by 10% against the Kiwi from its 2015 low, there’s at least a couple of rounds of schnapps in that.