Yield is the driving force in markets, including foreign exchange.
The economies in Australian and New Zealand might not be booming the way they used to be but the carry trade is endlessly attractive.
Over the past week, in days of risk aversion and risk appetite the high yielders — especially NZD — have outperformed. The kiwi is the best performer this year and the aussie is third (after JPY).
The days of central bankers in Australia and New Zealand lamenting unfair exchange rates probably aren’t over but they’re nearing the end. Technically, NZD/USD is showing signs of a bottom.
NZDUSD daily chart
The chart shows:
- The first higher low (or a double bottom)
- A break of 0.7847 will mark a higher high
- A break of the downtrend will point to gains
Overall, it comes back to yield. A New Zealand 10-year government bond — although it’s illiquid — pays 3.6% compared to 2.02% in the US, 0.51% in Germany and 0.29% in Japan. That’s a powerful force.
For the Australian dollar, Chinese CPI data is only a few hours away and a low reading will renew enthusiasm about rate cuts. Technically, there is also reason for excitement.