AUD/NZD: the impressive rally can get to 1.0900 this week - Westpac

Analysts at Westpac's outlook for AUD/NZD and rates...

Key Quotes:

"AUD/NZD 1 day: The rally has accelerated but there’s potential to push on to the 1.0900 area during the week ahead, given the move has been fundamentally driven by iron ore and AU-NZ interest rates. That level is fair value according to interest rates and commodity prices.

AUD/NZD 1-3 month: Higher towards 1.09. The cross remains below fair value estimates implied by interest rates, commodity prices and risk sentiment, although it is closing the gap. There’s potential for a rebound in iron ore prices this year, given high steel prices (24 May).

AU swap yields 1 day: The 3yr should open around 2.13%, the 10yr around 2.90%.

AU swap yields 1-3 month: Our RBA outlook (on hold for some time) is anchoring front end valuations. We expect 3yr swap rates to remain in a 1.8% to 2.3% range, with core inflation still below 2%. (28 May)

NZ swap yields 1 day: NZ 2yr swap rates should open down 1bp at 2.22%, the 10yr down 3bp at 3.31%.

NZ swap yields 1-3 month: The RBNZ has signalled the next cycle – a tightening one – will not start until the end of 2019. That will anchor the short end, although markets will not abandon their expectations for tightening as early as mid-2018 which means occasional spikes in the 2yr will be likely. A 2yr swap range of 2.10%-2.60% is expected. The long end will continue to follow US yields, which we expect to rise by year end."