
The end of
Quantitative Easing (QE) in the US has been well signalled and if the monetary
authorities Stateside have anything to worry about now it is the extent to
which such tapering will be the cause of volatility in the markets, and in
particular in Foreign Exchange. Traders are, or should be, now focused on how
to profit from moves by the Federal Reserve to rein in its bond buying program.
The battle
between very large economies, such as the USA
and Japan ,
to depreciate their currencies relative to each other in the interest of achieving growth has had some
side effects on other, smaller economies, not all of them welcome in the long
term.
One example
is how the global economic situation has affected those antipodean neighbours, Australia and New Zealand . Not all of their
rivalries are on the rugby pitch. Many FX traders have succeeded in making a
decent living from the way their respective currencies interact. Each has had
to vie with the other to decide who would have the highest yielding currency (read high interest rates) in order to avoid a bubble economy due, largely, to external factors. While the Kiwis have had to worry about global trends (with particular emphasis on China) in Powdered Milk prices, for the Aussies it has been Iron Ore (ditto).
All this has been of considerable interest to the Carry Trade.
There is
general consensus that both the New
Zealand dollar and the Australian dollar
need to have their values reined in, and this will happen against the
backdrop of US tapering. Already, in May of this year, New Zealand
authorities intervened in the FX markets to effect a reduction in the value of
their currency, while the Reserve Bank of Australia (RBA) has embarked on a
round of cash rate cuts to achieve the same purpose.
There is
little doubt our friends in Oz are winning this particular battle. The chart
above, of the AUD against the NZD, leaves little doubt about this. When
intervention by the NZ central bank took place the AUDNZD rate was north of 1.20.
It is now just above 1.13, having broken through a significant support at 1.20
which, as well as being a nice round number, also coincides with the location
of the 200 period Simple Moving Average (SMA) on the monthly chart (blue line).
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