Goldman Sachs: Two Banks Converged In A Yellow Wood

Goldman Sachs note that this week’s “RBA meeting could be a catalyst for further strength in AUD. We have highlighted that long AUD/NZD is our preferred expression of monetary policy divergence in G10 this year, and continue to think it will outperform on this theme.”

• “Our economists expect the RBA to hike by 25bp and reiterate its forward guidance that “the Board expects to increase interest rates further,” though there is risk that it is softened. Eventually we see the Bank hiking to a terminal rate of 4.00%, about 30bp above current market pricing.”
• “Meanwhile, our economists recently revised their call for the upcoming RBNZ meeting following a softer labor market report out of New Zealand. Together with other signs of moderation in inflation pressures, they think the latest data will lead the RBNZ to hike by 50bp at the February meeting (vs 75 previously). Consensus remains at 75bp, though other professional forecasters have also revised their expectations lower.”
• “The reaction in AUD/NZD to the latest economic data has kept us optimistic in our view that the convergence in policy between the RBA and RBNZ should continue to favour upside in the cross.”