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Summary
- Since 1 November, AUD/NZD has traded in a ~1.0650/1.0950 range.
- This week’s RBA meeting tacked more hawkishly than we expected.
- The market had already been pricing RBNZ hawkishness.
Market Implications
- We see value in leaning against the bottom of the range outlined above and initiating a long AUD/NZD.
- We target the top of the range but are mindful that below the May 2023 low of ~1.0560, the pair may slide further.
AUD/NZD Upside Looks Attractive
We had expected a dovish update at the RBA’s February meeting, following a weaker-than-expected Q4 trimmed mean outturn.
We were wrong; hawkish stubbornness remains.
And, with AUD/NZD trading near the bottom of the range seen over the past three months, together with the pair now trading on top of a multiple year trendline support level, we like AUD/NZD upside.
A Battle of Stubborn Central Banks
The RBA’s first meeting of 2024 proved more hawkish than we had anticipated. The statement eased forward guidance but kept a soft tightening bias: ‘a further increase in interest rates cannot be ruled out’.
This is because resilient services price inflation overshadowed goods price inflation, which declined faster than the RBA forecasted in their November Statement on Monetary Policy (SoMP).
Elsewhere, the bank considered progress in the labour market as positive, but that it remains tighter than where models suggest full employment is.
In short, the RBA have set themselves up to be stubbornly hawkish.
The RBNZ have pursued a similar tactic since their last hike (back in May 2023!). Most recently, Chief Economist Paul Conway ignored the dovish details of Q4 non-tradables inflation, which only beat forecast due to one-offs.
Given markets have already priced RBNZ hawkish stubbornness, a continuation at the meeting February meeting will fail to raise front-end yields much. Instead, we see risks that Aussie front-end yields play catch-up. This should help AUD/NZD strengthen (Chart 1).
Time for China Positivity?
Plenty of news from China over the past month suggested incoming support for the economy. However, these lacked substance.
Earlier this week, news that CSRC has briefed President Xi Jinping about the turmoil have rekindled hopes of a more decisive shift. Foreign inflows have surged, with the CSI 300 having its strongest week since November 2022.
We think this can support, then help drive, AUD/NZD higher (Chart 2).
Multi-Year Trend Supports AUD/NZD
As a result, we like AUD/NZD to trade back to its November high at ~1.0950. Alongside central bank catch-up and potential China upside, AUD/NZD sits atop a multi-year trend (Chart 3).
This trendline support, together with the pair trading near the bottom of its recent three-month range, should take AUD/NZD back to the top of that range.
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Richard Jones writes about FX and rates markets for Macro Hive. He has traded and invested in interest rate and FX market portfolios spanning three decades, both on the buy-side and sell-side.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)