Liquid Insight: AUD/NZD – could tax changes trigger a reversal?

Research evidence excerpt

Liquid Insight: AUD/NZD – could tax changes trigger a reversal?

Exhibit 2: 1y1y rates tend to fall after the RBNZ leaves rates on hold Exhibit 3: AUD/NZD around levels implied by rate differentials

Average 1y1y yield move 1 day, 5 days and 30 days following RBNZ rate Risks are more balanced but skew to slightly wider differentials

decisions (bps)

2.5 1y1y rate diff. AUD/NZD 1.4

8 1-day (1y1y) 5-day (1y1y) 30-day (1y1y)

1.5

4 1.3

0.5 0

1.2

-4 -0.5

1.1 -8 -1.5

-12 -2.5 1

+25bps hold -25bps 06 08 10 12 14 16 18 20 22 24 26

Source: Bloomberg Source: Bloomberg

BofA GLOBAL RESEARCH BofA GLOBAL RESEARCH

Could tax-rate differentials weigh on AUD/NZD?

Over the longer run, we think the migration channel is becoming more important and

may at least partly offset other drivers. New Zealand’s tax system stands out globally for

its absence of a broad-based capital gains tax, meaning most asset appreciation is not

taxed, aside from targeted rules, such as the bright-line test for property or cases where

assets are acquired with intent to resell. In contrast, Australia taxes capital gains as part

of income and is now moving towards tighter treatment, including a minimum tax on

gains and reduced concessions.

The net result is a growing wedge between after-tax returns on capital across the

Tasman. While this is unlikely to drive large-scale flows in isolation, it could be

significant at the margin, particularly for mobile, high-wealth cohorts or entrepreneurs

whose location decisions affect both labour supply and capital formation.

Reversal of migration patterns: a necessary but not sufficient condition?

Typically, AUD/NZD tracks labour-market differentials between Australia and New

Zealand. AUD/NZD’s close relationship with unemployment rate differentials declined in