AUD/NZD seems likely to struggle – Westpac

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Sean Callow, analyst at Westpac, points out that the AUD/NZD rally quickly fizzled out after cash rates converged for the first time since early 2014 in the consequence of May meetings of RBA and RBNZ.

Key Quotes

“The RBA’s decision was seen as likely to be a mere delay before cutting the cash rate as far as 1%, whereas the RBNZ implied it was in no hurry to follow up with another cut, saying that after the cut, it now has “a more balanced outlook for interest rates.”

Key Quotes

“Market pricing is now for 2 RBA cuts but just short of 1 more RBNZ cut. Still, yield spreads have been indicating that AUD/NZD is “cheap” for some time.”

“When combined with relative commodity prices, our short term fair value estimate for the cross is well above 1.10. However, in coming weeks, AUD/NZD seems likely to struggle as markets focus on relentless debate over when the RBA will cut rates, uncertainty linked to Australia’s federal election and the return of US-China trade tensions, which tend to hurt AUD more than NZD.”

“Once these have passed or been fully priced in, AUD/NZD has potential to break sustainably above 1.0700.”

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