Sean Callow, analyst at Westpac, suggests that the RBNZ’s shock 50bp rate cut on 7 August ignited a steep AUD/NZD rally, from the 1.03 handle to 10 month highs above 1.08 in late September.

Key Quotes

“AUD/NZD has consolidated in a 1.0650-1.0800 range and near term risks seem tilted modestly lower. While Australia’s broad commodity export basket has recovered some of its steep decline in July-August, iron ore has lost momentum this month and the demand outlook suggest further losses. Meanwhile we have raised our forecast for NZ dairy prices.”

“Market pricing for further cash rate cuts has been trimmed for both the RBA and RBNZ, partly in line with global yields as US-China trade tensions have eased but also on local data and the tone of central bank officials.”

“The RBNZ has more easing priced in than does the RBA, so based on our forecasts of one more cut each, AU-NZ rate spreads could fall slightly. This suggests the cross spends plenty of time under 1.0700 into month-end.”

“But that would be an opportunity to buy, for a multi-month move to 1.1000, backed by fair value estimates holding well above 1.1000. On our calculations, AUD/NZD has been undervalued to some degree since 2016 but the gap has narrowed over 2019.”

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