So really the awkward thing about another Australian rate rise is that it can be necessary and still do damage.
That is where today left me. Australia’s inflation number gave the RBA another reason to lean harder on demand, while New Zealand decided to wait and see how much its earlier tightening was already doing.
We are getting further into the part of this cycle where every decision comes with a bill. Wait too long and inflation becomes harder to remove. Push harder and the weakness can arrive well before the inflation problem has disappeared.
This is the shit show im looking to take advantage of... Slower growth does not guarantee that central banks can come to the rescue. Sometimes it simply means households and businesses have less room to absorb the next increase.
Across the Tasman Sea (aka next to Australia), a narrow majority at the RBNZ decided it could afford more time. The bank still expects further tightening, but wanted another look at the recovery before moving again. That is a meaningful difference in how the two central banks are weighing the risks.
The obvious response was to sell Australian rates against New Zealand and buy the Australian dollar against the kiwi. There is a sensible macro story behind both. There is also a sizeable move already on the screen.
I’m more interested in what comes after that first reaction, Australia may have to do more, and doing more may leave the economy weaker.
There is a trade in that central bank dilema for the next one to three weeks. Below, I explain the position I prefer, why I’m wary of chasing the NZ rally, and the entry and exit conditions that would turn the view into a trade.
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