NAB: Sub-NZ$1.08 Levels Not Expected To Last Long

NAB note that “the recent divergence in RBA and RBNZ policy approaches - RBNZ stepping up its rate hikes, lifting the OCR by 75bps to 4.25% and calling a terminal rate of 5.50% vs the RBA stepping down to 25bps hikes despite no let-up in surging CPI and wages inflation - has been a key factor in the narrowing of AU-NZ rate spreads, driving a significant reversal in the cross. From a high of just under NZ$1.15 in late September, to sub NZ$1.08 today.”

• “We think that the cross is due for a period of consolidation and are not picking a further sustained extension of the AUD/NZD downturn. The RBA has been running the line - since the beginning of the tightening cycle - that Australia is “different”, with less upside potential for CPI and wages inflation than others.”
• “This narrative is not being backed up the data and there is a rising chance that the RBA will be tightening well after the RBNZ (and Fed) has stopped.”
• “In addition to the rate spread dynamics, we think growth relativities will again become a consideration with NZ facing a tougher 2023 than Australia. Our updated projections have the AUD/NZD settling around NZ$1.11-1.13 over the course of next year. Near term, rates spread dynamics are dominating, but we don’t expect the current sub-NZ$1.08 move to last long.”