AUD/NZD to recover to 1.07 – Westpac

Sean Callow, analyst at Westpac, points out AUD/NZD spiked above 1.07 in April on New Zealand’s low Q1 CPI data and again in May when the RBNZ cut its cash rate, but the RBA’s dovish turn seems to have been more potent on the cross in recent months.

Key Quotes

“RBA governor Lowe has effectively committed to another cut, to 1%, but seems reluctant to go further, hoping for help from fiscal policy. Interest rate markets however are pricing a terminal rate below 0.70%, compared to around 1.0% for the RBNZ.”

“This arguably fits with the stimulus Australia could need to cut its unemployment rate to the desired 4.5%, while NZ is already at 4.2%. The focus on the RBA seems likely to persist well beyond the expected cut to 1%.”

“The cross is also weighed by the apparent market preference for AUD as a proxy for USChina trade relations, where a major breakthrough seems some way off. This points to a probe of 1.03-1.04 multi-day/week.”

“But relative commodity prices strongly favour AUD, with Australia’s trade surpluses surging over the past 12 months, keeping our short term fair value estimate for the cross well above 1.10. We see scope for AUD/NZD to recover to 1.07 multi-month.”