The AUD/NZD currency pair is on my radar, with the potential for a lucrative trade stemming from upcoming decisions by the Reserve Bank of Australia (RBA) and the Reserve Bank of New Zealand (RBNZ). The kiwi (NZD) has been weakening lately, fueled by market expectations of a substantial 50 basis point (bps) rate cut by the RBNZ at their next meeting on October 9th.
While there are valid arguments for this expectation – the RBNZ’s current rate stands relatively high compared to other economies (at 5.25%), inflation has returned to target, and economic indicators have softened – there are also reasons for caution. The RBNZ has emphasized a ‘careful and measured’ approach to rate cuts, prioritizing the maintenance of inflation expectations. They maintain that positive economic growth indicators suggest the cuts are more about ‘removing restraint’ than stimulating growth. Therefore, the RBNZ hasn’t fully embraced a dovish stance that would warrant a 50bps cut, and I believe the market may be leaning too heavily towards this expectation.
However, the trade setup itself leverages these expectations. Since the market is already pricing in a 50bps cut, it wouldn’t be a surprise if the RBNZ actually does cut by 50bps, potentially creating a positive environment for the trade. This aligns with my reasoning for going short on AUDNZD.
On the RBA front, I maintain the view that they will be compelled to cut rates sooner than they’ve publicly indicated. We’ve already seen a shift towards delaying rate hikes, and the next step could be data pointing towards a rate cut. There might even be a ‘Bailey-style flip’ in the pipeline – though not immediately.
My trading strategy involves initiating a short AUDNZD position, intending to profit from the RBNZ’s potential move. If the market anticipates a 50bps cut and the RBNZ only goes for a 25bps cut, this should provide a good starting point for the trade. I might then hold onto the position to capitalize on a potential RBA rate cut later on.
Of course, it’s important to remember that unforeseen events could significantly impact this scenario. The AUD’s strength could be sustained by the ‘China hopium’ trade, which refers to the potential economic upswing in China.
I’d prefer to enter the short position at a slightly higher AUDNZD rate, ideally around the previous highs near 1.1150. Otherwise, I might start with smaller positions around the 1.10-1.1050 range.
It’s crucial to acknowledge the inherent risk in this trade. The RBNZ could have witnessed a considerable shift in economic and inflation indicators since their last meeting, potentially adopting a more dovish stance. This is a risk that I’ll incorporate into my trading risk parameters and management strategy. If my assumptions are incorrect, I’m prepared to accept the consequences within my defined risk parameters. As with all my trades, my primary focus is on managing risk, with profit potential being a secondary consideration.
