Goldman: Revising Our Forecasts And Turning Bullish On The Cross

Goldman Sachs note that “the RBNZ surprised at its last meeting with more hawkish policy guidance, leading our economists to revise up their projected rate path to show two more 50bp hikes in July and August (vs 25bp hikes previously) and a higher terminal rate. Markets similarly priced in a steeper RBNZ hiking cycle in response, reversing most of the dampening of expectations seen during the broader risk sell-off in recent weeks. While the central bank will likely remain committed to bringing down inflation expectations in the near-term, we see a strong case for the rate differential versus Australia to move against NZD over the coming year. If the risk backdrop worsens, then the extent of current pricing means greater scope for RBNZ hikes to be taken out than RBA hikes - similar to the price action earlier this month. But even in a more benign scenario, we see more room for RBA pricing versus the RBNZ to build in a faster pace of hikes and/or higher terminal rate. Overall, the RBA is only at the start of its hiking cycle (the cash rate target currently stands at 0.35%) with a more lagged inflation trajectory, while the RBNZ has already raised rates back to 2% - which was the bank’s estimate of neutral prior to the pandemic. Our standard FX models suggest that the relative policy outlook tends to be the biggest driver by far of the AUD/NZD cross, followed by risk sentiment (a slightly bigger driver of AUD over NZD on the margin). Meanwhile, we find a generally more neutral impact from shifts in China growth expectations. As a result, we have revised our AUD/USD and NZD/USD forecasts, and we now expect AUD/NZD to move higher to NZD1.11, NZD1.11, and NZD1.12 in 3, 6, and 12 months (vs. NZD1.08, NZD1.07, NZD1.07 previously). Although we prefer AUD on a relative basis, we remain more cautious on the broader risk backdrop in the near-term and thus still expect the Dollar to strengthen against both currencies over the next 3 months.”