Goldman Sachs: More Divergence Down Under

Goldman Sachs note that "the steady recovery in New Zealand's economy, as well as the surge in domestic house prices, have resulted in another policy pivot from the RBNZ. At its meeting last week, the Bank removed a commitment to hold off from policy rate hikes until employment "is at" its maximum sustainable level, and indicated that "the level of monetary stimulus could now be reduced." The RBNZ also unexpectedly announced an end to its LSAP, despite indicating as recently as May that exiting from easy policy required "considerable time and patience." Following the surprisingly hawkish RBNZ meeting and an upside surprise in inflation later in the week, our economists now expect a first rate increase next month (vs. Q123 previously). They do not expect a similar shift from the Reserve Bank of Australia (RBA), which appears more focused on muted domestic wage and price trends, and our official forecasts anticipate Australian policy rates remaining well-below market forwards. As a result, we are revising our NZD and AUD forecasts to incorporate more divergence in the region. We now expect NZD/USD to reach $0.71, $0.73, and $0.75 for 3-, 6-, and 12-months, respectively (from $0.70, $0.72, and $0.75 previously); we have also marked-to-market our AUD/USD forecasts, now projecting $0.74, $0.74, and $0.76 for 3-, 6-, and 12-months, respectively (from $0.76, $0.78, $0.78 previously). Our revised forecasts imply the AUD/NZD cross will fall to NZD1.01 in 6 months, from about NZD1.06 currently."