Buy the dips in AUD/NZD – Westpac

Strategists at Westpac noted that pullbacks in the cross could be buying opportunities.

Key Quotes

“The 9 Feb RBNZ sparked a steep rally from around 1.0450 to above 1.06, with NZ yields sliding on a slightly dovish tone to the statement’s outlook and Gov Wheeler declaring markets were premature in pricing a 2017 hike (pricing for Nov back to about 50/50). In contrast, the RBA erred on the upbeat side of expectations in its monthly statement, quarterly statement and speech by Gov Lowe, retaining a 3% growth forecast for end-2017 and again in 2018 despite the dismal Q3 GDP data. The very strong Jan NAB business survey vindicates the RBA’s optimism, at least for now”.

“Relative commodity prices are dovetailing with yield spreads to support AUD/NZD. Since China’s return from lunar new year, spot iron ore has surged to highs since Aug 2014, copper prices have leapt and the 2016 coal price rally will continue to support trade surpluses for some time. Chinese media indicates tighter credit conditions after a flurry of lending in Jan but ongoing expansion of fiscal spending on infrastructure. Dairy prices meanwhile remain well up on the year but have eased lately”.

“Fair value estimates have been pointing to a sharply higher AUD/NZD for months, so patience is needed. After such a steep rally and with a relatively quiet NZ calendar near term we prefer dips in the pair to enter longs. We look for a pullback to the 1.0575/1.0600 area, targeting 1.0765 (14 Oct high). A break of this level opens daylight above. Thursday’s Australian employment data is a potential source of volatility as usual, our economists look for an above-consensus reading though there is always the risk of a downside surprise”.