AUD/NZD should recover to 1.11 by year-end - Westpac

Sean Callow, Research Analyst at Westpac, points out that the AUD/NZD rallied above 1.11 in response to the RBNZ’s dovish MPS on 9 Aug as it lowered its GDP forecasts and RBNZ’s McDermott said that the chances of a rate cut have increased.

Key Quotes

“Further such commentary in recent weeks has encouraged markets to price in as much as a 40% chance of the RBNZ cutting rates by mid- 2019.”

“This is in stark contrast to the RBA’s message on its cash rate, where Australia’s strong GDP data backed the RBA view that the next cash rate move will be a hike, albeit still quite a distant prospect.”

“Overall, yield spreads continue to trend in AUD’s favour.”

“Relative commodity prices are also increasingly supportive of AUD/NZD, with coal and LNG outweighing weakness in metals.”

“Yet AUD/NZD has pulled back to the familiar 1.09 area. Some AUD/cross underperformance seems linked to Australia’s political turmoil, while AUD seems to be preferred over NZD as a proxy for US-China trade tensions.”

“As such, there remains near term risk of at least a brief slide towards 1.07 (June lows). But if the relative commodity and yield story continues in Q4, the cross should recover to 1.11 by year-end.”