AUD/NZD is attempting to break back above 1.1100. The pair probed above this level overnight but couldn’t sustain gains. A fresh break above this level would see us targeting the high 1.1100 region, last seen in June.
- Fundamentals are still pointing higher for the cross, although current levels look a little high relative to yield spreads. The chart below overlays AUD/NZD versus the 2yr swap spread. The divergence looks even larger against 2yr government bond spreads, although the gap is narrowing.
- Such a backdrop may hinder near term upside in AUD/NZD but dips are still likely to be supported. As we noted yesterday, the external account balance is heavily skewed in AUD's favor at present. Note the 50-day MA for the cross comes in at 1.1041.
- Next week's data will also help shape relative rate directions. The main focus will be on AU Q2 CPI (out Wednesday). Upside risks prevail given global trends and the firmer than expected Q2 prints in NZ, which still maintains a reasonable correlation with AU CPI data.
- The market consensus is for a further decent step up though - headline to 6.2% from 5.1% in Q1, 4.7% for the trimmed mean (the RBA’s preferred core measure) versus 3.7% last quarter.
- Retail sales for June on Thursday also print, while in NZ the focus will be on the ANZ business activity and confidence prints for July, which are out on Thursday.
- Underlying data momentum is still in AUD's favor. The Citi AU-NZ relative EASI differential is off record highs, but only marginally.
Fig 1: AUD/NZD & AU-NZ 2yr Swap Spread
Source: MNI - Market News/Bloomberg