FxWirePro Short Term Outlook: Break of 1.05 Likely to Lead Aussie to Parity Against Kiwi

FxWirePro Short Term Outlook: Break of 1.05 Likely to Lead Aussie to Parity Against Kiwi

Reserve Bank of Australia, in its detailed monetary policy statement released today, has reduced its inflation forecast ahead and signaled more aggressive monetary stimulus.

RBA expects inflation to be between 1 and 2% for 2016 and between 1.5 and 2.5% in 2017, which gives Reserve Bank of Australia leg rooms to ease policy further. Its target range for inflation is between 2 and 3%. According to latest figure for first quarter inflation grew 1.3% y/y down from 1.7% y/y observed in fourth quarter last year. Even core inflation is weak at 1.5% y/y.

RBA’s change in stance from confident over inflation to aggressive stimulus provider has shaken up Aussie against almost all pairs and we expect it to continue remain shaky, also against its closest neighbor New Zealand Dollar, known as Kiwi.

Reserve Bank of New Zealand (RBNZ), also likely to reduce rates further but that has been somewhat priced in, unlike Aussie. As of RBNZ has kept OCR at 2.25% and RBA providing stimulus means that gap is either to stay or widen, giving Kiwi an edge over Aussie.

Moreover, recent commodity frenzy in China, which led to sharp rise in iron ore prices may seem Aussie supportive but in the longer run pose greater risk than soft commodities pose to Kiwi.

Trade idea –

With such view, we expect Aussie to weaken further from current 1.079 area to first 1.05 area. That is a critical level and likely to provide some support but if broken, expect Aussie to hit parity against Kiwi.

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