MNI Insight: AUD/NZD FX: Most Roads Point North, But Risks Remain

Executive Summary:

• AUD/NZD risks still appear biased to the topside. The cross has recovered strongly in recent months and yield momentum is pointing to further gains in the period ahead. Measures of Australian core inflation have now surpassed NZ’s, which suggests the RBA has more work to do in coming months. We may well now be past the peak in terms of relative rate pricing in the 1yr ahead period.
• Relative growth momentum is also expected to trend in AUD/NZD’s favor, particularly given NZ recession risks. Still, relative data surprises haven’t evolved rapidly in AUD’s favor, while recent NZ survey outcomes have moved up from recent lows.
• The relative commodity price backdrop has also turned less favorable for AUD/NZD. Correlations have been much lower with the cross though in recent months. There is also optimism a China recovery this year will drive AU’s commodity basket higher. The nature of China growth is likely to be important, with a focus on services/consumption outcomes relative to housing/infrastructure.
• Finally on the technical backdrop, the outlook looks constructive. We are below early February highs, but MA studies remain bullish. Upside targets are at 1.1045, the Nov 11 high, then 1.1101, the 61.8% retracement of the Sep 28 - Dec 16 down leg. Key support rests at 1.0881 the Jan 31 low. Our sense is the market will maintain a buy on dips mentality, given the above macro backdrop.
• See the full note below for more details.

AUDNZD (Feb 10 2023).pdf