AUD & NZD: Too high, too fast - HSBC

Analysts at HSBC suggests that  a further fall in AUD and NZD in the coming weeks should be spurred on by strong signals from the respective central banks that rate hikes are some way off and currency strength has once again become a problem.

Key Quotes

“Tactically, selling the AUD and NZD also looks attractive in riskreward terms given signs of resurgent risk aversion and softer China data.”

“Tactically, we are short AUD-USD, targeting 0.7650. Our belief that it is the AUD that needs to correct lower, rather than market rates moving higher, has been re-enforced by recent RBA rhetoric. For instance, Governor Lowe stated on the 11 August that current market pricing appears reasonable. At that time, one 25bp hike was fully priced only by the end of 2018. Furthermore, RBA board members have played down the significance of the 3.5% “neutral” cash rate estimate recorded in the July meeting minutes, signalling that the market’s hawkish reaction was a misinterpretation, while also indicating that cash rate normalisation is still some way off and will occur only gradually – e.g. Assistant Governor Kent (14 August). The RBA has also upped its communication on the currency, with the August meeting statement including a new section on the AUD, warning of the negative economic impacts of a higher exchange rate.” 

“Arguably the RBNZ has been even more aggressive in its opposition to currency strength. The August policy statement dialled up the rhetoric, stating that a lower NZD was “needed” rather than just that it would “help”. Subsequent comments by Assistant Governor McDermott even admitted that this shift in language was the first step towards possible intervention. Further underperformance versus the AUD may be limited as AUD-NZD is near the top of its recent 1.041.10 range, while 0.7200 remains a key psychological support level for NZD-USD.”

“There are other reasons to be tactically bearish AUD and NZD, aside from rate differentials. Both currencies tend to perform poorly when risk aversion rises and it is noticeable that AUD-USD and NZD-USD have fallen 1-2% since the VIX spiked on 8 August. Higher volatility could persist as geopolitical concerns related to the Korean peninsula remain and central bank balance sheets come back on the agenda – The Economic Policy Symposium at Jackson Hole (24-26 August) and the FOMC’s next meeting (21 September) are clearly dates for investor’s diaries.”

“Chinese activity data also printed below consensus across the board in July. In particular, this could weigh on iron ore – Australia’s biggest commodity export – given price gains in June and July had largely been attributed to strong growth in China’s demand for steel. The upward momentum in dairy prices – New Zealand’s key commodity export – may also be stalling, judging by the bi-weekly GDT auction results, which saw average whole milk prices fall (0.6%) for the first time since June.”