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Despite the recent correction, AUD/NZD has additional room to the upside, Sean Callow, Senior Currency Strategist at Westpac noted in its latest research report.

Key quotes

“AUD/NZD fell steadily from above 1.10 in August to nearly 1.04 early Dec, with fuel from New Zealand’s strong economic rebound which stoked expectations that despite all the preparation, the RBNZ would not adopt a negative cash rate after all.

Partial data showed broad strength in the NZ economy as reopening proceeded without much covid interruption and the housing market bubbled. Markets stopped pricing in a negative cash rate after the RBNZ’s 11 Nov meeting where the tone was more upbeat.

Australia’s economy has also mostly beaten expectations in its recovery since mid-2020, including unexpected resilience in retail sales and employment in Victoria. But in Nov the RBA cut its key interest rates and announced an aggressive program of A$100bn bond purchases over just 6 months.

But the contrast in perceptions of relative monetary policy seemed to reach its peak in Nov and since the RBA’s on-hold Dec decision, AUD/NZD has recovered strongly, shrinking our estimates of undervaluation. While NZ dairy prices have trended higher, Australia’s trade position is much stronger, aided by China’s industrial-led rebound, iron ore prices reaching 9-year highs. Despite the correction of recent days, we see the upswing extending to 1.1050 multi-week.”