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Monetary policy divergence | AUD/NZD Trade Example
Welcome to a quick trade example on AUDNZD.
This trade has been taken by Jarratt‘s FX team in London and recorded to demonstrate exactly how they make money from fundamentals and news flows on a daily basis.
This trade took place on the 2nd of March 2016 on AUD/NZD, and was fundamentally based on monetary policy divergence between the RBA and the RBNZ. The entry catalyst was GDP from Australia, and the bar seen in the chart of nearly 100 pips was Gross Domestic Product which as seen on our Live News Feed came out at 3% y/y versus expectations of 2.5%, and at 0.6% q/q versus expectations of 0.4%.
To put this into context, we had the RBA come out only the day prior, leave rates on hold and make no significant dovish alterations to their statement, which helped further support the AUD. GDP beating expectations the day after was the nail in the coffin and saw AUD strengthen across the board.
From the RBNZ’s perspective, Auckland’s housing market had started to slow down, dairy prices continued to decline, and inflation data remained subdued. For these reasons we knew there was a good chance that the RBNZ would cut rates at their next meeting on March 10.
Although we normally advise against buying at the highs or selling at the lows, in this particular instance the fundamentals were so strong and with a wide stop below the 1.08 handle, it was fine to buy AUD/NZD and hold it into the RBNZ rate decision. After a period of consolidation, it certainly started moving up and we did get the rate cut from the RBNZ.
Half of the position was closed for 300 pips profit, with the second position held slightly longer for a profit of 325 pips. Total profit for the trade came to roughly $6,000 and provided a good example of monetary policy divergence.
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