AUD/NZD extending the RBNZ RBA playoff-rally before key data

AUD/NZD will be the cross to watch today. It is currently trading at the top of its range in the late 1.07 handle, having travelled from a low of 1.0754 to a high of 1.0772. The cross has been bullish since mid-March and the facts are starting to confirm the earlier consensus.

AUD/NZD has rallied from below parity in March on the basis that the Reserve Bank of Australia was less likely to commit to a larger-scale series of QE or move into negative rates when comparing it to the Reserve Bank of New Zealand. In recent times, the RBA has continued to reduce its bond purchases.

The RBA was opting to not buy on Monday or Wednesday this week in fact. By contrast, the RBNZ just announced that it was effectively doubling its QE program to NZD60bn of purchases over the coming year and that negative rates are not an impossibility.

"It will be interesting to see how the RBA manages the liquidity impact of the settlement of the AOFM’s record AUD19bn syndication for the new Dec 2030 line," analysts at ANZ Bank explained.

Historically, the RBA would ‘sterilise’ the impact this has on exchange settlement (ES) balances. But with the abundance of surplus ES balances, it may not do so this time. In which case, the surplus balance will drop sharply on settlement of the bond.

Semis have continued to richen to bond, though this trend paused on Wednesday after the RBA decided not to purchase semis. This pause may extend if the RBA remains on the sidelines in coming weeks. Primary supply has slowed, for now at least, which will help relative performance.

SSA supply has increased a little over the past week. On a cross-market basis, tapping the AUD market may be a more attractive proposition for SSA issuers now that spreads have compressed.

Key events ahead

Meanwhile, for the day ahead, we have both the Aussie jobs data as well as the NZ Budget. Firstly for a preview of the Aussie event, see here: When is the Australia unemployment rate and how could it affect AUD/USD?

Thereafter, New Zealand’s government will publish the 2020 budget. Analysts at Westpac explained that they are looking for an operating deficit close to -10% of GDP for the next two fiscal years:

In addition, the government is expected to announce billions of dollars of new spending to bolster the recovery phase. Net public debt is expected to rise to 150% GDP by 2024, and bond issuance could increase by NZ$60bn over the next two years. March net migration is set to fall sharply due to border closures. RBNZ Governor Orr testifies to Parliament’s Select Committee on the MPS.

AUD/NZD levels