Next Week Shapes As An Important One For The Cross

The AUD/NZD cross continues to drift lower, last around 1.1025. We are below the 50-day MA, which comes in at 1.1061, while the 100 day MA (1.1007) is now within sight. While the pair has had plenty of dips below the 50-day MA in recent months, we haven't been below the 100 day MA in a meaningful way since December last year.

• Next week shapes up as an important one for the cross. The broader macro backdrop still suggests dips in the cross should be supported. The relative Citi surprise index trends still remain in AUD's favor. We are slightly down from best levels on this differential but we remain close to historical highs.
• This is still being reflected in relative rate/yield differentials, see the first chart below. To be sure, the recent correction in the AUD/NZD spread puts it back in line with levels of the 2yr AU-NZ swap spread.
• The 2yr spread hasn't been able to get much beyond -40bps this year (we currently sit at -45bps). It's a similar theme in the government bond yield space.

Fig 1: AUD/NZD & 2yr AU-NZ Swap Spread Differential

Source: MNI/Market News/Bloomberg

• Next Wednesday is likely help shape the relative rate outlook, at least from the perspective of domestic event risks. We have both the RBNZ decision in NZ and the Q2 wages outcome in Australia.
• The RBNZ is widely expected to hike by 50bps, taking the policy rate to 3.00%. Focus is likely to rest on the outlook, where the rough consensus looks for the central bank to strike a hawkish tone as it battles to bring down inflation pressures/expectations.
• The Q2 wages outcome in Australia has the market expecting a +0.8% rise in QoQ terms, nudging the YoY pace to 2.7%. Whilst this would be the strongest pace in YoY since early 2014, will it shift the RBA needle? The market still looking for rates above 3.25% by year end (futures based).
• Interestingly though, the AUD/NZD has tended to rise post RBNZ hikes during this cycle. The second chart below plots average AUD/NZD performance in the 10 days prior to and 10 days after RBNZ hikes (with 0 at the bottom of the chart representing hike days, where AUD/NZD levels are indexed to 100).
• Average gains are 0.4-0.5% in the 5-10 days after the RBNZ has hiked in this cycle, although the trend is volatile. The best gain for the cross post a hike (using closing levels) has been close to 2%, the worst performance, a -1.1% dip.
• Upside in AUD/NZD following RBNZ hikes is likely to reflect the catch up play to better macro backdrop outlined above. Australia's stronger external trade position arguably hasn't hurt either.

Fig 2: AUD/NZD Has Typically Risen Post RBNZ Hikes In This Cycle

Source: MNI/Market News/Bloomberg