Kiwi versus Aussie | The importance of China

      

We have just taken a position to short the AUD/NZD pair. A week ago we highlighted the fact that it was attempting to get through technical support at the 1.120 level. The time has now come to act on that. The support indicated is so well established that a genuine break through has every chance of being a sustained one.

The Fundamental Analysis comparison between the two economies is compelling, and the key to it is the Chinese nation. Australia sends Iron Ore, coal and natural gas to the People’s Republic but this trade is now more than a little unreliable, due to the fact that the importing country has capacity of its own and is, in any event, adjusting to a lower growth model. The new China will be of benefit to Australia, but in the long run rather than in the short to medium term.

New Zealand exports dairy products to China. Various news reports have it that baby formula, in particular, is now so scarce that people have been arrested for smuggling it through Hong Kong to the Chinese mainland. There is a thriving black market and shortages in the West as a direct result of the demand from Chinese parents, the same parents that are now to be given the right to have more than one child by the recently announced reforms.

New Zealand dairy production is set to increase by a factor of 90% in some regions in the next few years. While there are environmental concerns, these can and will be overcome.

Australian monetary authorities are deeply concerned by the relative strength of the Aussie dollar. Right now they are content to try to talk it down, but it is known that they are also considering market intervention in order to achieve this result. New Zealand, on the other hand, has gone public on its contemplation of the idea of raising interest rates in the future. The Reserve Bank of New Zealand sees short term interest rates rising over 200 basis points from 2.5% now to over 4.5% within two years.

So we see the time as right to take a position.