AUD/NZD: It is a race to the bottom between the RBA and RBNZ

AUD/NZD has rallied to the 200-day moving average and found support overnight on the 50-day moving average with a confluence of prior resistance and the 23.6% Fibo retracement of the move that followed the Reserve Bank of New Zealand's surprise decision to cut by 50 basis points.

The outlook for the immediate future is swamped with major risk events which include Chinese CPI, RBA's Governor Lowe speaking and, not least, the RBA Monetary Policy Statement (SMP). 

AUD/NZD is a play on the central banks and race to the bottom, hence, AUD/NZD is higher this week. The risk environment plays more of a role when it comes to the AUD leg of the cross considering Australia's closer ties to what goes down in 'China-Town' and the commodity complex in general. 

There is a slightly improved risk environment as the latest hysteria has calmed down following some speculation that the Chinese will be do all that they can to stabilise the Yuan and that trade negotiation will continue despite the US administration's recent call to impose more tariffs on Chinese imports. A meeting has not been confirmed, but Larry Kudlow announced that one will take place between the US and Chinese officials as soon as September. This has helped to lift USD/JPY and stocks, which has sent AUD/JPY higher as well as AUD/USD, supporting AUD/NZD into the forthcoming risk events. 

Monetary Policy Statement (SMP) outlook

For the end of the week, the Monetary Policy Statement (SMP) could be a stark reminder of the RBA's renewed pessimism with respect to their inflation and unemployment targets.  "The new forecasts have the unemployment rate drifting down to 5 per cent “over the next couple of years”. That, therefore, represents an increase in the unemployment outlook, given that the previous forecasts factored in 4 ¾ per cent by June 2021. On inflation, we have gone from a forecast of 2 per cent in 2020 and 2 per cent in the year to June 2021, to 1 ¾ per cent in 2020 and 2 ¼ per cent in 2021. While the 1 ¾ per cent looks realistic, the jump of ½ of a percentage point to 2 ¼ per cent looks like a stretch," analysts at Westpac explained. This could be a weight on AUD/NZD should the market pull out of the Aussie. 

AUD/NZD levels 

AUD/NZD has rallied to the 200-day moving average but needs a compelling on hold story to come from the RBA to significantly overcome this barrier or a positive fundamental shift in Sino/US trade progress. Should the market factor in an additional third cut for this year, you would expect the cross to pull back and target a break below 1.0480 stops for a declining drift towards 1.0420 and the 20-day moving average, 38.2% Fibo target area of the recent 6th Aug spike's lows and 8th Aug highs.