MNI Insight: AUD/NZD FX - Rate Differentials Still Point Down, Relative Commodities Offsetting

Executive Summary:

• Through the first half of December the AUD/NZD cross has stabilized, broadly oscillating around the 1.0600 level. This comes despite market pricing around the respective central bank outlooks continuing to move against the AUD. Relative rate differential momentum continues to point to further downside in the cross. A fresh break through recent lows could see 2021 lows come into play under 1.0300.
• Relative commodity prices are painting a different picture though and have arguably helped stabilize sentiment. Since the first half of November relative terms of trade proxies have moved in the AUD’s favor as market optimism around China’s shift away from CZS brightens the 2023 outlook. This could leave relative commodity prices as more important driver of the cross as we progress through 2023, particularly once we get closer to an RBNZ rate cycle peak.
• A firmer AU commodity price backdrop is far from assured next year though, with lots of moving parts influencing the outlook. Growth prospects in the US/EU etc are fairly downbeat at this stage and could present a meaningful offset to any China rebound.
• See the link below for the full piece.

AUDNZD Update (Dec 15).pdf