AUDNZD: Near Term Risks Skewed Lower, But Dips Likely To Be Supported
The AUD/NZD cross is holding lower, last near 1.1420/25 just up from session lows of 1.1407. NZD is the main outperformer in the G10 space, up 1.25%, as the earlier hawkish RBNZ 25bps cut drove short covering (with a potential end to the easing cycle). NZD/USD may continue to outperform in the near term, particularly if broader risk trends stabilize/improve further. As we noted earlier, "the risk into the RBNZ today is if they are not dovish enough and any hint of a potential future pause could provide short-term headwinds for some of the weaker hands".
- Still, it is interesting to note the lack of downside in the AU-NZ 2yr swap spread in the aftermath of the RBNZ, see the chart below. If these trends persist, it suggests AUD/NZD dips should be supported. The 1.1250/1.1300 region is likely to generate demand.
- Of course earlier we also had the stronger-than-expected Oct monthly Australia CPI, which has supported local AU rates.
- With the AU–NZ 1-year forward 3-month swap (1Y3M) spread also holding near recent highs, the question of whether rates or FX markets have it right ultimately hinges on the outlook for the AU–NZ cash rate differential. At present, markets expect the AU–NZ 3-month rate spread to narrow by about 25bps over the next 12 months.
- However, we see risks skewed towards the most likely outcome as both the RBA and RBNZ keeping policy rates unchanged. Moreover, the balance of risks around that view leans toward the RBNZ cutting and the RBA hiking.
- The RBNZ maintained its easing bias in November, and Governor Hawkesby noted that the OCR track implies any next move in 2026 is more likely to be a cut than a hike.
- By contrast, the RBA has not adopted a clear stance. Q3 underlying inflation was at the top of the target band, and October’s print was above it. The Bank is watching closely for signs of inflation persistence, and if inflation proves stickier than expected, further tightening could return to the table.
Fig 1: AUD/NZD Spread & AU-NZ 2yr Swap Rate Differential
Source: Bloomberg Finance L.P./MNI
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