NZD/AUD Forecast Lower on Chinese Commodity Grab

The New Zealand to Australian Dollar exchange rate (NZD/AUD) is forecast lower as China starts to stockpile heavy industry resources.

The NZ Dollar is looking increasingly vulnerable against its trans-Tasman cousin the Aus Dollar with the latter  expected to rise as China embarks on a programme of commodity stockpiling. 

The commodity grab comes in anticipation of an expected reflationary boom in commodities due to Donald Trump’s massive infrastructure plans.

The price of Copper is already shooting higher on increased demand and other metals are likely to follow suit, given ‘Dr Copper's’ role as an early indicator of economic trends.

“In the commodity markets there were sharp rises in the price of Gold, Iron Ore and Copper as China ramped up its purchases.

“China looks to be stock piling commodities ahead of the potentially inflationary presidency of Donald Trump,” said analysts at HiFX in a recent briefing to clients.

The Australian Dollar is perfectly positioned to take advantage of the increased demand from Chinese stockpiling.

“These moves should be positive for the Australia Dollar which has been weak of late and we have seen the NZ Dollar drop sharply vs the Aussie Dollar overnight,” say HiFX.

The increase in demand for hard commodities which favours Australia is not expected to me mirrored by an increase in demand for soft commodities from New Zealand, however, leading to a divergence in demand for the two currencies, which is likely to produce volatility in AUD/NZD.

“China has the capacity to stockpile the hard commodities that Australia produces whereas New Zealand’s soft commodities do not lend themselves to being stored for long periods.

“This should help the Aussie Dollar stage a rebound vs the NZD over time,” say HIFX.

NZD/AUD Overbought as it Deviates from ‘Fair Value’

The New Zealand to Australian Dollar exchange rate (NZD/AUD) is quite far above its estimated ‘fair value’, which is calculated at 0.8850, according to HIFX’s model, based on the difference between NZD and AUD 2-year government bond yields.

The difference has expanded even more since November 16, but is currently pulling back down lower, however, it ultimately indicates a likelihood that the pair is going to fall to closer to its fair value over time.

This chimes neatly with the outlook based on the idea that the Aussie will appreciate more than the Kiwi due to increased Chinese demand for commodities which can be stockpiled.

However, not everyone sees the end of the New Zealand Dollar's ascension against its Australian counterpart.

Morgan Stanley Back the NZD/AUD

Don't bet against the New Zealand Dollar just yet argue Morgan Stanley who in their latest foreign exchange briefing confirm to clients they remain structurally bearish on the Australian Dollar.

"We are structurally bearish AUD and expect it to underperform NZD," say Morgan Stanley. "The market has priced too hawkish a path for the RBA given weak employment data and our expectation for a negative 3Q GDP print."

It is also suggested that Australia will be hurt as China's mini-cycle recovery slows (as we already see in the housing data).

This slowdown in housing would be at odds with the argument that China is gearing up to absorb more commodities.

However, it does also suggest that the current commodity stockpiling is more speculative than fundamentally justified.

While the RBA may not cut rates for the foreseeable future, Morgan Stanley believe it will make sure the market reflects its easing bias, weakening AUD.

"AUD is also particularly vulnerable to rising US interest rates given its high yield (relatively speaking) status and current account deficit," say Morgan Stanley.