J.P.Morgan: Sell AUD/NZD

Friday saw J.P.Morgan note that "the RBNZ caught markets off-guard - while some have compared this surprise to the BoC's surprise upgrade in rates guidance last month, that downplays the fact that the RBNZ not only forecasted a hike next year, but did so from a starting base of easing bias last meeting (not the case for the BoC). Kiwi rates and FX have understandably repriced significantly in the aftermath of this apparent reaction function shift. We think there is tactical upside still left before longer-term cyclical issues present policy headwinds, but in the meantime, NZD has somewhat undershot short-end rates, suggesting potential upside at least until housing price momentum moves closer to zero. Selling AUD/NZD in this environment makes the most sense, as this juxtaposes a surprisingly hawkish bank against what the RBA, who is increasingly asserting itself as one of the most dovish central banks in G10. Relative rates curves between the two show an aggressive differentiation - now approaching 2.5 hikes in favor of NZD over a 2-year horizon. Nevertheless, RBA dovishness (policy objectives "unlikely" to be met by 2024), faltering iron ore prices, and a more-clearly slowing Chinese growth outlook now present a more direct trajectory for weakness versus AUD, and so we set our targets on our new 2Q21 forecast for AUD/NZD (NZ$1.03) and NZ$1.01 in 3Q."

• As a result, they issued a recommendation to go short AUD/NZD at NZ$1.0635 with stop loss at NZ$1.0900.