Robin Winkler, Strategist at Deutsche Bank, thinks the Aussie's weakness has more legs and they remain short against NZD to minimize exposure to volatile geopolitics.
“First, the Aussie's correlation with iron ore should tighten again as prices fall through $65. This was roughly the level at which the Aussie disconnected from iron ore at the end of last year. There is broad consensus, even among miners, that the rally above this level was unsustainable on market fundamentals. Below $65, however, iron ore weakness should do more damage. Our commodity strategists see the terminal price this year at $50. The kiwi, by contrast, is not only trading in line with commodity export prices but will also likely beneﬁt from rising dairy prices, see recent solid auction.”
“Second, falling commodity prices mean the Aussie is no longer protected against the tightening real rate spread against the US, which already points to 70 cents. To make matters worse, rates pricing may underestimate the likelihood of the RBA turning more dovish again in the second half of the year. Latest minutes suggested that once recent macro-prudential tightening shows signs of cooling the housing market, the RBA could act faster than the market appreciates in trying to generate more wage pressure in the labour market. The RBNZ, by contrast, is likely to be surprised today by another CPI print above its forecasts. Our economists' forecast of 0.9% q/q is well above the RBNZ's 0.3% projection as well as the 0.8% consensus. If inﬂation indeed beat expectations, there would be plenty of room for repricing a ﬁrst hike by November with only ~8bps baked into the OIS curve at present.”
“Lastly, long positioning in AUD/NZD on the IMM (if not on Corax) is heaviest since early 2013 and makes the cross vulnerable to commodity prices and rates moving in opposite directions. We continue to target parity in the medium term.”