Aussie, Kiwi Dollars Rise on Growth Prospects After BOJ Decision
Comment of the Day

January 22 2013

Commentary by Eoin Treacy

Aussie, Kiwi Dollars Rise on Growth Prospects After BOJ Decision

This article by Candice Zachariahs for Bloomberg may be of interest to subscribers. Here is a section
The Australian and New Zealand dollars rose against their U.S. counterpart after the Bank of Japan said it would expand monetary stimulus, boosting prospects for global growth.

Both currencies rose briefly against the yen after Japan's central bank said it would set a 2 percent inflation target and shift to Federal Reserve-style open-ended asset purchases in its strongest commitment yet to ending two decades of deflation. Japan is Australia's second-largest trading partner.

“For global growth it's a good thing to have some expansive monetary policy in Japan,” said Derek Mumford, a Sydney-based director at Rochford Capital, a currency risk-management company. “It's supportive of the Aussie dollar as it's attempting to speed up growth and get inflation in the Japanese economy.”

Eoin Treacy's view The Yen was the carry trade currency of choice prior to the financial crisis because of its low interest rate, liquidity and general weakness. The proverbial Mrs. Watanabe, in an effort to secure a competitive yield invested abroad to avail of a positive interest rate differential and currency advantage. This was particularly bullish for Australian and New Zealand higher yielding assets. Speculators followed a similar pattern by borrowing Yen and capturing the differential by investing in higher yielding assets.

Australian short-term interest rates have fallen back to 3% but compared to Japan's 0% bound remain quite attractive by comparison. New Zealand's 2.5% short-term rates also offer a positive carry. In an environment where the Bank of Japan appears committed to weakening its Yen, yield hungry investors and speculators seeking cheap funding may be encouraged to revisit the Yen carry trade. The risk to this view is that RBA continues to lower rates.

The Australian Dollar Trade Weighted Index broke out to new all-time highs at he beginning of the month and while mildly overbought in the short term a sustained move below the 200-day MA, currently near 140.5 would be required to question medium-term scope for some additional strength.

The New Zealand Dollar Trade Weighted Index also continues to trend consistently higher and a break in the progression of higher reaction lows, currently near 144, would be required to question medium-term scope for additional upside.

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