RBA to hold; RBNZ has stronger easing bias.
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Interest-rate spreads between AU and NZ and the currency cross have been heavily impacted by large swings in relative pricing of the policy outlook between the two countries this year. Both the RBA and RBNZ have cut rates once in 2016 and we expect them to cut again. The timing is more of a challenge so expect a continuation of the dynamic shift in the policy outlook for both countries. Ultimately, we expect to see a resumption of the compression of market interest rates evident from 1Q15.
The RBA board meets on 7 June and the RBNZ meeting and Monetary Policy Statement (MPS) follows on 9 June. We do not expect a cut from the RBA, especially in light of the 1Q GDP data. We think there is a stronger case for the RBNZ to ease than the 25% currently priced.
In our view, it should be at least 50/50. The RBNZ has a stronger easing bias and is under greater pressure to weaken the currency. The NZD Trade Weighted Index (TWI) has not weakened to the same degree as the AUD over the past three years (see Chart of the Day). The correlation between the cash rate differential and the spread between the AUD and NZD TWIs is 0.70 over the past 10 years, but is 0.92 since 2010.
Consistent with our rates view, we believe AUD/NZD is getting close to levels where it would present an attractive buying opportunity. We remain on the sidelines ahead of next week’s critical central bank decisions.
But a drop in AUD/NZD towards its range lows of 1.05 if the RBNZ stays on hold would likely present good risk-reward for entering longs, assuming its forward looking guidance and MPS projections are sufficiently dovish relative to the RBA’s.