AUD/NZD – Primed for reversal into 2020 – Westpac

Sean Callow, Senior Currency Strategist at Westpac, in his latest research note, offers a multi-week outlook on the AUD/NZD cross heading towards 2020, with risks skewed to the upside.

Key Quotes:

“The RBNZ is responsible for the 2 biggest daily moves in AUD/NZD in recent months, firstly by delivering a -50bp OCR cut in August, then by holding steady in November. The RBNZ doesn’t meet again until February, so perhaps AUD/NZD will avoid such dramatic moves into year-end.  

Relative commodity prices have moved in New Zealand’s favor in recent weeks, with dairy outperforming coal and iron ore.

But relative trade positions still point to AUD/NZD fair value being much higher, well above 1.10, as Australia records trade surpluses so large that is printing current account surpluses for the first time in 40 years, in contrast to NZ’s current account deficits of around -3% of GDP.

But monetary policy is likely to remain the main driver of movement in the cross in coming weeks. We believe NZ rates markets have over-reacted to the RBNZ’s steady hand in Nov, with only about a 1/3 chance priced for the Feb 2020 OCR cut Westpac expects. The Feb RBA easing we also expect is about 2/3 priced.

US-China trade relations are another factor, with any positive news supportive of the cross.

Overall, we see any further extension of last week’s losses towards 1.0550 as an opportunity to buy the cross for a reversion towards fair value. Multi-week AUD/NZD could target 1.0800, multi-month 1.1000.”