Above 1.1200, Fresh Multi-Year Highs

The AUD/NZD cross has continued to trend higher, breaking above 1.1200 overnight. We were last at 1.1215/20, fresh highs back to late 2017.

• We noted earlier in the week that the AUD/NZD trend was outperforming relative yield trends. This remains the case, see the updated chart below of AUD/NZD versus the 2yr AU-NZ swap spread.
• Short term correlations (past month) remain around flat, but sit close to 90% for the whole of 2022. At face value this suggests upside AUD/NZD momentum could ease if we don't see yield/swap spreads also push higher.

Fig 1: AUD/NZD Versus AU-NZ 2yr Swap Spread

Source: MNI/Market News/Bloomberg

• The other point we made earlier in the week that the AUD/NZD cross was inversely related to the recent equity dip. We suspected this likely reflected Australia's stronger external current account position relative to NZ.
• Still, while the recent rebound in equities/lower VIX levels has certainly benefited the NZD, AUD has still outperformed, which suggests other factors are at play.
• The recent announcement from Fonterra, which cut its milk price forecast, plays into the continuing divergence in the relative terms of trade trends for both currencies, see the second chart below.
• Again though, correlations between these series are only running at 30% for the past month, below the 69% correlation for the whole of 2022.
• It may also be the case that A$ is benefiting from dividend related inflows, particular from a short term standpoint, a point we highlighted earlier in the AUD bullet.

Fig 2: Citi Relative AU-NZ ToT and AUD/NZD

Source: Citi/MNI/Market News/Bloomberg