NEWS / Foreign Exchange

G7 meets in Washington - AUD, NZD rallies further

Summary and conclusions

• The IMF??™s International Monetary and Financial Committee (IMFC) and the joint IMF - World Bank Development Committee (DC) meet in Washington this weekend. Prior to the gathering, as is customary, G7 finance ministers and central bank governors will get together. From a currency market perspective, the meetings are relevant in terms of comments on exchange rates as well as on global imbalances. We expect the IMF to report in detail on its thoughts on how to curtail imbalances but also expect the Fund to be short on practical steps to solve the situation. As for the G7, we expect no market moving comments on the yen or on carry trades. However, more pressure on China to allow for its currency to appreciate could emerge - despite rapid Chinese growth and a booming trade surplus, USD/CNY has flattened in recent months and EUR/CNY has risen. We continue to be biased for a rise in EUR/USD and in EUR/JPY.
• Both the Kiwi and Aussie dollars have now fully recovered from the end- February/early March sell-off, with AUD/USD notching up a 15-year high and NZD/USD trading at 2-year highs. Relative interest rates, strong commodity prices and renewed risk appetite in the financial markets explain a lot of the recent strong performance - but the time has now come to consider whether the comeback has further to run. Our feeling is that while it is too early for AUD and NZD to turn south yet, the rally has come too far to last beyond the current quarter.