The Australian and New Zealand dollars (AUD and NZD) are often carelessly lumped together in the “commodity currency” basket.
But this forgets differences in monetary policy, trade fundamentals and links with market sentiment. And it was a confluence of these three factors in recent sessions that encouraged UniCredit to take profit on its long AUD/NZD trade.
Dr Vasileios Gkionakis, global head of forex strategy at the Italian bank, said he remained fundamentally bullish on the exchange rate but noted headwinds in the shorter term.
The kiwi was little changed against the greenback on Thursday, even after the Reserve Bank of New Zealand played down the prospects of interest rate rises later this year.
In contrast, the Aussie was down more than half a per cent by mid-session versus the buck as Mr Gkionakis noted “short-term pressures building in iron ore prices, which have fallen by more than 8 per cent since mid-March”.
Such raw materials make up a significant chunk of Australian exports.
Finally, the Aussie tends to have a tighter positive correlation to global investor optimism and so, when the market mood is more cautious, it tends to underperform the kiwi.
The recent modest reduction in risk appetite has the potential to pressure AUD/NZD, given the pair’s positive beta to risk assets, Mr Gkionakis said.
“We will be looking to re-initiate our trade recommendation once iron ore prices stabilise and risk sentiment improves,” he said.