Father of Five : On Milk powder, AUDNZD interest rate differentials, Time to buy AUDNZD?

Just some thoughts post RBNZ hike last week.

Chart below compares the movements in the spread of the Central Bank official rates between NZD and AUD and the movements in the AUDNZD rate.

As can be seen from the chart below, the interest rate spread differential has gone negative. However, it has not gone as negative as it has done so before in 07-08 period.  However, AUDNZD is lower than before.  Eg spread differential in 07-08 was NZ > AU by 2-2.25%, but AUDNZD bottomed out around the 1.05ish region.   Currently, spread differential is 0.25%, but AUDNZD is around same rates as 08.

Why would AUD be bottoming around here vs NZD?

  1.  Improving data and neutral RBA.
  2. AUD traditionally would be “supported” vs the NZD as there is a liquidity premium attached to NZD.
  3. During time of risk aversion, NZD is higher beta, and tends to fall faster due to illiquidity. As a FoF, milk prices are something close to my heart.  My home consumption of milk and dairy products is > than the average household in Singapore.  Anyway, milk prices from Fonterra auctions seems to show a big disparity vs Milk futures.  Fonterra prices have actually come off quite a fair bit.http://www.globaldairytrade.info/en/product-results/  vs chart milk futures chart below.

Milk Futures Chart

milk futures


Yellow line = interest rate differential between AU and NZ.

Is it time to buy AUDNZD ?



Afterword by Tradehaven
Milk prices have traditionally been used by traders to correlate to the NZD dollar’s strength given their agrarian based economy and Fonterra, their multinational dairy co-operative, being the largest milk and dairy exporter in the world.