AUD/NZD: Buy dips in the cross - Westpac

Sean Callow, Research Analyst at Westpac, explains that the RBNZ’s pushback against market pricing for a 2017 rate hike and outperformance of Australia’s commodity export basket over New Zealand’s sparked a steep rally in AUD/NZD from early February to mid-March.

Key Quotes

“We have long argued that the pair was undervalued so view the move as largely catch-up to fundamentals. Some consolidation in recent days doesn’t change our underlying inclination to buy dips in the cross.”

“Our preferred buy zone is near 1.0750, targeting 1.10+. Whether AUD/NZD dips as far as 1.0750 in coming weeks probably depends on increasingly volatile iron ore prices and broad risk appetite, with AUD showing itself to be more sensitive to US equities than NZD. An overhang of long AUD futures positions may weigh on AUD/NZD near term.”

“Relative monetary policy should offer limited direction for the pair near term, with both RBA and RBNZ firmly on hold. But yield spreads continue to argue for a stronger Aussie.”