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Rate Differentials Widen, Better China PMIs Provide Some Offset


Widening rate differentials post the weaker than expected inflation and GDP prints in Australia point to potential further downside in AUD/NZD.

  • Rate differentials sit at -127bps, ~12bps wider today. The chart below overlays AUD/NZD against the 2yr spread.
  • Jan CPI printed at 7.4%, lower than the expected 8.1%. Q4 GDP printed 0.5% QoQ vs 0.8% exp. RBA terminal rate expectations sit below 4.2% vs 4.35% pre-data.
  • The one positive offset can come from firmer China data outcomes. The cross stabilized post the release of the China PMI's showing the A$ has a higher beta with respect to China developments. This is something to be mindful of as we progress into the People's Congress this weekend.
  • Still, AUD/NZD broke below its 200-Day EMA yesterday, in the absence of any overt headline driver, which suggests technical flows may have been the catalyst. Bears now target the 2023 low at $1.0708, bulls look to regain the $1.10 handle.

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

Source: MNI/Bloomberg

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