AUD: Star Likely To Dim; NZD: Negative Bias To Catch-Up:

The Australian and New Zealand dollars had their time in the sun. Can this continue? Not so fast:

Here is their view, courtesy of eFXnews:

The Aussie dollar has been the star performer of 2017 so far, having risen by roughly 5% against the greenback since January 1st. The upward momentum in commodity prices, improved growth in Australia’s largest export market, China, and strong labour market data have all combined to see the Aussie rally from its December lows.

However, with sentiment having swung so far and investors now holding net long positions in the currency (Chart 5), the Aussie may be vulnerable to  another slide. While global growth sentiment is strong currently, any dents to that, for example from increased protectionism stemming from the US and aimed at China, could weigh on commodity currencies such as the A$. Moreover, the annual rate of core prices fell to 1.6% in the fourth quarter as a weak employment market has seen soft wage growth recently.

Even though it remains unlikely the RBA would cut again and risk fuelling an already excessively levered consumer, markets may at least move to price in the possibility of a cut if global sentiment turned.  That would see the Aussie retrace its current upward move and weaken to  0.73 by the end of Q1.

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Negative Bias to Catch up With NZD.

Sentiment against the NZD has been significantly negative recently, with net short positions peaking at levels not seen since July 2015. Yet, despite that negative bias, the NZD has been the second best performer amongst major currencies. A rebound in dairy prices has seemingly overshadowed the change in positioning.

However, the recent strength in the currency could raise the ire of the RBNZ, particularly as the currency remains significantly overvalued on measures of PPP, the economic surprise index has started to reverse and house prices have begun to moderate. While Governor Wheeler has recently stated that rates are likely to remain at the current low level for some time,  as inflation has returned to the 1-3% target for the first time since Q2 2014, any elevation of downside risks to that forecast would put another cut back on the table.

As such, we see the NZD struggling in the near term against a US$ buoyed by interest rates moving in the opposite direction.  We see NZD weakening to 0.69 by the end of Q1.