New Zealand dollar to outperform Australian dollar after RBA easing

The central banks of New Zealand and Australia are now looking at alternative strategies for dealing with inflation, so the kiwi (New Zealand dollar) is poised to continue its rally against its Australian counterpart.

While the Reserve Bank of Australia (RBA) raised its benchmark rate by 25 basis points last week, New Zealand decided to raise it by 50 basis points.

Analysts said it may be time for traders who have been long on the Australian currency against the kiwi this year, a strategy that has yielded 8.3%, to turn around. Rising rate differentials and technical factors indicate that the trade will turn around in the last quarter of the year.

Patrick Bennett, a currency strategist at Canadian Imperial Bank of Commerce in Hong Kong, said that selling the Aussie currency against its counterpart is an obvious trade as it still looks very overvalued relative to rate spreads, as it has been for some time. According to Bennett, the divergence of the rate spreads points to 1.10 as the first target. The AUDNZD currency pair closed Friday at 1.1371.

The Reserve Bank of Australia may find more evidence to support its strategy if data on consumer inflation expectations on Thursday confirm a downward trend. According to National Australia Bank Ltd. the RBA's change in stance creates an "inevitable headwind" for the Australian dollar.

Technical factors also create a favorable environment for the weakening of the Australian currency against the New Zealand currency. On September 28 the pair formed a bearish pattern similar to a "shooting star" and the momentum has become bearish as the currency pair is retreating from the overbought zone.

However, some experts are confident that this bearish impulse is short-lived.

The head of macroeconomic research of Deutsche Bank AG in Sydney Tim Baker thinks that this impulse will not last long before the current account imbalance of New Zealand will lead to the decrease in the rate of New Zealand currency against its counterpart. He added that the country's central bank is ignoring growth warning signs and pushing the country into recession, which will have a negative impact on the national currency.