AUD/NZD: Downside coming? – Deutsche Bank

The market still doesn’t believe the Fed, with market pricing well below the dots which recently led to NZD and AUD trading toward the top of their two-year range vs the USD, notes Tim Baker, Strategist at Deutsche Bank.

Key Quotes

“It’s difficult to see that being undermined soon – that would require some (so far elusive) signs of inflation. But what about the AUD/NZD cross? We think the Antipodes has their share of unbelievability also.”

“So what is tough to believe? In Australia, we don’t believe the strong jobs number is an accurate read on the underlying economy. It’s not being mirrored in wages and spending – they’re both poor. While the RBA is firmly on hold, the risk is that continued softness in spending sees a dovish tilt later this year.”

“In NZ, we don’t believe the disappointing Q1 GDP tells the true strength of the economy. Stripping GDP back to its private spending components (ie, consumer spending, housing, business capex) reveals strong growth, and far in excess of what Australia has posted (5% vs 1%). This is consistent with the robust signal from the ANZ business survey and employment. Notably, even with Australia’s good jobs growth, the relative employment/population ratios of the two countries have moved markedly in NZ’s favour, and point to AUD/NZD downside.” 

“Further, NZ’s reported GDP growth of 2½% isn’t all that bad anyway – it puts them towards the top of the G10 league table, while Australia is sinking. Correspondingly, NZ inflation is towards the high end also. As a result, we see scope for an RBNZ hike early next year. Lastly, the relative commodity price picture is bearish for AUD/NZD. The iron ore price has hit a one-year low (as swing supply has ramped up), while dairy prices remain resilient. The ratio of the two suggests AUD/NZD downside.”