Alvin T. Tan, Research Analyst at Societe Generale, suggests that the longer-term picture remains that the two antipodean currencies have bottomed out, and should continue to ascend and expects AUD to outpace NZD going forward.
Key Quotes
“Antipodes have shared in the weak inflation phenomenon, and subdued inflation allows both the RBA and RBNZ to be patient. The last 2Q inflation readings from Australia and New Zealand show inflation readings under 2%. The RBNZ chief economist mentioned yesterday that NZ core inflation is estimated to be 1.4% currently, while the RBA’s trimmed mean CPI was reported at 1.8% in 2Q 2017. At an even more fundamental level, wage growth in both countries remains sluggish despite robust labour markets.”
“ RBA Governor Lowe repeated his deputy’s comments last week that the RBA was not obliged to “move in lockstep” with other central banks in undertaking monetary tightening. The point was that just as Australia did not cut the policy rate to zero, it therefore had less of an impetus to tighten policy while inflation pressures remained moderate. A similar sentiment likely prevails across the Tasman Sea.”
“To add to this, both central banks remain sensitive to the exchange rate, and the nominal trade-weighted AUD has risen 5% year-to-date, though the trade-weighted NZD is relatively unchanged over the same period. It was no surprise that Lowe repeated his wish for a lower AUD in his speech.”
“On the flipside, both central banks are becoming increasingly concerned about the financial stability implications of their respective long housing booms. The IMF too has been warning about the risks associated with the housing market in both countries.”
“The longer-term picture remains that the two Antipodean currencies have bottomed out, and should continue to ascend from a combination of yield attractiveness, positive global risk sentiment and the US dollar downtrend. Moreover, we expect the RBA to hike rates in March 2018 as inflation pressures build gradually.”
“It should be noted that RBA and RBNZ rate cuts in 2016 did not drive their respective currencies to fresh lows. So further Antipodean currency strength is not fully dependent on monetary tightening. AUD/USD 0.80 should be broken before long, likely by 4Q 2017. We also expect AUD to outpace NZD going forward, and look for a retest of AUD/NZD 1.10 by year-end.”
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