In the view of Sean Callow, Senior Currency Strategist at Westpac, AUD/NZD is set to recover ground in the first quarter of 2019.
Key Quotes:
“Last month, the kiwi jumped on New Zealand’s strong Q3 labour market data which set up the RBNZ to drop its rate cut threat the next day. Last week, the Aussie slumped on Australia’s surprisingly weak Q3 GDP report which saw rates markets wipe out pricing for an RBA rate hike in 2019.
Yet the net impact on the 2 year AU-NZ yield spread has been quite small, with both the RBA and RBNZ signalling a steady hand for some time – in the case of the RBNZ, steady “into 2020.”
Meanwhile, relative commodity prices have swung in AUD’s favour over the past 6 months or so. As a result, AUD/NZD is currently 7% below 1.12 fair value – the third largest deviation over the past decade.
Price action this year has often hinted at AUD being preferred to NZD as the proxy for the state of US-China trade relations. This suggests that a major breakthrough might be required before the 1 March deadline to spark AUD/NZD revival. Still, our fair value estimates leave us expecting the pair to recover back towards 1.10 during Q1 2019.”
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