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  • AUD/NZD bulls holding the fort while bears bank on RBA QE.
  • Aussie jobs and RBA will be a major focus in the coming weeks.

AUD/NZD has moved into a consolidation following a steep decline from the 1.0864 November tops to a 78.6% Fibonacci support level sub the 1.04 handle while the kiwi took up the driving seat into the final quarter of the year. 

At the time of writing, the cross is trading at 1.0405 in a 10-pip range in what now appears to be higher odds of rate cuts from the Reserve Bank of Australia than New Zealand’s central bank. 
“Markets are pricing a 55% chance of easing at the Feb RBA meeting, and a terminal rate of 0.47% (RBA cash rate currently at 0.75%). Market pricing for RBNZ implies only a 10% chance of easing in February, with a terminal rate of 0.87% (RBNZ OCR currently at 1.0%),” analysts at Westpac explained.

Aussie jobs were solid enough

Casting minds back, the Employment data from Australian for November posted its strongest monthly gain in over a year of 39.9k, although the majority of the gains were in part-time employment though (+35.7k) and the total gain wasn’t enough to lift annual employment growth, which remained steady at 2.0% YoY. However, Unemployment ticked back down to 5.2% and underemployment fell 0.2ppt to 8.3%. 

RBA to move to QE?

“While we expect employment growth to slow materially, in time, the surprising strength of November’s labour market report is a significant challenge to our expectation that the RBA will cut in February,” analysts at ANZ Bank explained, adding, that Australia’s Reserve Bank has little room left to stimulate the economy by cutting the cash rate. “Market attention has turned to unconventional monetary policy tools, in particular quantitative easing.”

If the RBA decides quantitative easing is necessary, we think its first choice will be government bond purchases aimed at pushing bond yields lower to reduce the appeal of the AUD. We think purchases of residential mortgage-backed securities and/or other steps to lower mortgage rates are unlikely in the absence of disruption to markets. The rapid turn in Sydney and Melbourne house prices indicates the transmission channel between monetary policy and housing is working well at present.

We don’t expect the RBA to turn to QE in 2020. After a couple more rate cuts to 0.25% and explicit forward guidance, we think it will wait before considering further steps, provided no shock occurs that prompts immediate action.

AUD/NZD levels