21 Jan 2015
AUD/NZD: Big picture trends a reflection of labour market performance - DB
FXStreet (Bali) - Big picture trends in AUD/NZD reflect labour market performance, with the relationship between relative inflation and AUD/NZD being very weak, notes Deutsche Bank.
Key Quotes
"The relationship between relative inflation and AUD/NZD is very weak. Interestingly, however, there has been no consistent relationship between relative headline inflation in Australia and New Zealand and the AUD/NZD cross over the past 14 years. The relationship between respective measures of core inflation and the cross was reasonable from 2001 to 2010. That said, over the most recent half decade relative core inflation rates have been poor guides to AUD/NZD. This remains the case even if we exclude the spike higher in NZ inflation in 2010 which reflected an increase in the GST. (Note that for ‘core’ inflation we have used non-tradables inflation in NZ versus an average of the trimmed mean & weighted median in Australia – consistent with ‘norms’ in both countries.)"
"Big picture trends in AUD/NZD reflect labour market performance. Relative labour market conditions are very tightly correlated with trends in AUD/NZD – and much more so than relative inflation. Front end rates much more closely reflect relative labour market trends than relative inflation trends. Of course, if one takes the view that slack in labour markets - and increases and decreases in that slack – have an impact on inflation with a lag, then such behavior in the rates and FX markets makes sense."
Key Quotes
"The relationship between relative inflation and AUD/NZD is very weak. Interestingly, however, there has been no consistent relationship between relative headline inflation in Australia and New Zealand and the AUD/NZD cross over the past 14 years. The relationship between respective measures of core inflation and the cross was reasonable from 2001 to 2010. That said, over the most recent half decade relative core inflation rates have been poor guides to AUD/NZD. This remains the case even if we exclude the spike higher in NZ inflation in 2010 which reflected an increase in the GST. (Note that for ‘core’ inflation we have used non-tradables inflation in NZ versus an average of the trimmed mean & weighted median in Australia – consistent with ‘norms’ in both countries.)"
"Big picture trends in AUD/NZD reflect labour market performance. Relative labour market conditions are very tightly correlated with trends in AUD/NZD – and much more so than relative inflation. Front end rates much more closely reflect relative labour market trends than relative inflation trends. Of course, if one takes the view that slack in labour markets - and increases and decreases in that slack – have an impact on inflation with a lag, then such behavior in the rates and FX markets makes sense."