AUD/NZD: Yield spreads to lead towards the 1.12 level – Westpac

AUD/NZD rallied aggressively from under 1.06 late July to highs above 1.10 late August. The past month has seen a sizeable retracement to as low as 1.0718 last week. This week the pair has climbed to the 1.0850 area, however, economists at Westpac see potential for a pullback towards 1.07 near-term but expect upside over Q4 to extend to 1.12.

Key quotes

“Some of the pullback seems likely to be due to the Aussie’s greater sensitivity to global risk appetite. The relationship between equity sentiment and AUD/NZD historically has been fluid, but this year at least the AUD seems to have been the preferred proxy for risk, the cross sliding about 5 cents during the March pandemic panic, probing parity on 18 March.” 

“We should expect further swings in AUD/NZD over Q4 as global equities gyrate on COVID-19 developments and the US election. But ultraloose monetary policy settings globally should limit the duration of equity selloffs.” 

“The Aussie has also lost some shine on the RBA outlook. The RBA expanded its TFF facility in Sep and is considering further easing. However, the RBNZ continues to prepare for a negative cash rate in 2021, and Westpac expects a cheap bank funding scheme to be announced at the November meeting. Yields spreads should again favour the AUD, pushing the cross to 1.12 by year-end.”