J.P.Morgan Recommend Long Position

J.P.Morgan are "bullish AUD/NZD, forecasting an increase to NZ$1.10 at Sep-22. With a few near-term dovish RBA event risks now out of the way (Governor Lowe's panel appearance, resumption of YCC purchases), and rate spreads asymmetrically biased to turn narrower, we open a long in AUD/NZD in cash at NZ$1.0442 (target: NZ$1.09, stop/loss: NZ$1.0290)."

• "Through the cycle, rate spreads are not always decisive for Antipodean FX, but they are a significantly more reliable valuation metric at the extremes of the range. The cross is fairly priced for today, but on a directional view that spreads will contract, the historical relationship suggests clear bullish sensitivity at current levels. With the 1Yx3M spread wider than 150bp, rate differentials become a much more precise predictor of the cross, compared to immediate levels of rate spreads between 0-50bp. The case for upward drift in the cross is just as strong were the NZD terminal rate to come down from current extreme levels, given the beta to 2Yx1Y spreads is similar."
• "Finally, of the two economies, NZD is also at greater risk, particularly under the market rates trajectory, of a financial stability shock occurring through the housing market, which would likely weigh on longer-term capital flows. This compares to AUD's mounting longer-term valuation tailwinds, particularly those accruing via the terms of trade channel."