AUD/NZD outlook as RBNZ expected to turn less hawkish in line with RBA

Giles Coghlan LLB, Lth, MA Financial Source

The RBNZ meet next week at 0300 UK time on Wednesday July 13. The outlook for the RBNZ has been robust and from last November they took the most aggressive stance towards hiking rates with a terminal rate pushing up to nearly 4%. You can read about their last rate meeting here.

Don’t just look at the rate decision

Short term interest rate markets are pricing in a 100% chance of a 50 bps rate hike and a 67% chance of a 75 bps rate hike. So, 50 bps is expected and a 75 bps hike will be a slightly bullish surprise. However, rate hikes most likely won’t be the focus on Wednesday as it will all be about the future path of rates for the RBNZ.

Reason for caution

The Bank of New Zealand’s recently projected that New Zealand could enter into a recession in 2023. This was after a poor business opinion print. The BNZ’s head of research warned that the latest ANZ Bank’s survey of business opinion was ‘littered with indicators that fit with our view that the economy is headed into recession’. Although short term Interest Rate Markets are projecting that the RBNZ will hike to 4% by the end of the year from the current rate of 2.00%, and BNZ project that the rate will only reach to 3.5%.

What’s the possible AUD/NZD trade?

The trade is to buy AUDNZD if we see a less hawkish RBNZ. This is because markets are already pricing in a lot of interest rate hikes. Notice this symmetrical triangle feature on the daily chart.

If BNZ’s research is correct, and the RBNZ confirm their findings, then the AUDNZD should drift lower. If you are unsure of how to interpret the decision, take a look at the bond yield spread between the AU10Y and the NZ10Y as that will give you bond traders view.

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Author

Giles Coghlan LLB, Lth, MA

Financial Source

Giles is the chief market analyst for Financial Source. His goal is to help you find simple, high-conviction fundamental trade opportunities. He has regular media presentations being featured in National and International Press.

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