The author is ANZ (The Australia and New Zealand Banking Group) Research
China is rapidly taking the focus away from the U.S. Federal Reserve.
There are a number of reasons that peripheral currencies are likely to remain quite sensitive to modest changes in China’s money market rates.
Liquidity tightness is (unusually) occurring with inflation very well behaved. Chinese bond yields are rising more rapidly, suggesting the bond market is expecting liquidity tightness to be sustained. There is an interesting, unfolding link between the Chinese Yuan and Chinese onshore liquidity.
In any case, the ability of the taper-delay to aid regional asset markets seems to be diminishing. The U.S. dollar is likely to remain soft against the majors in the near-term, while the Australian dollar and New Zealand dollar are likely to be weaker still.
Asian currencies may gain a little further in the near-term as taper expectations solidify on March 2014, but this trend is weak.
We argue that while relative fundamentals continue to favor New Zealand, this advantage is now in the price. We recommend that those with medium-term time horizons look to accumulate the AUD/NZD cross on weakness.
(The article has been edited for clarity)