AUD/NZD could pull back to 1.0650 in coming weeks – Westpac

Sean Callow, analyst at Westpac, notes that showing its sensitivity to US-China relations, on 6 Aug AUD/NZD hit lows since Sep 2016 when the US labelled China a currency manipulator, but found buyers under 1.03 and the next day was given substantial fuel from the RBNZ’s aggressive 50bp rate cut.

Key Quotes

“The cross has barely looked back since then, last week rising above 1.08 to highs since Nov 2018. The recent conciliatory tone in US-China trade relations has lent support to the pair.”

“Relative commodity prices still strongly favour AUD, with Australia’s trade surpluses at record highs, producing a current account surplus of 1%/GDP in Q2, versus -3%/GDP in NZ. Our short-term and long-term fair value estimates for the cross remain well above 1.10.”

“Near term though, relative interest rates and trade talks are likely to be the main drivers. We expect the RBNZ to retain its increasingly dovish tone, which included the possibility of a negative cash rate. But obviously the RBA is also open to further easing and a softening job market should prompt a cash rate cut in Oct, so AU-NZ yield spreads might not move far.”

“Meanwhile we doubt US-China trade talks in Oct will produce a major breakthrough. As such, AUD/NZD could pull back to 1.0650 in coming weeks but make a run towards 1.10 later in Q4.”