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Rate Spreads Still A Headwind, Other Macro Drivers Less So

AUDNZD

Relative rate differentials continue to point to lower AUD/NZD cross levels. Post this morning's AU monthly CPI miss, the AU-NZ 2yr swap spread is at fresh YTD lows of -142bps, see the chart below. Beyond this is lows around -152bps recorded in November last year.

  • Still, despite these relative monetary policy headwinds for the A$, the cross has been range bound for the past week. The pair has been supported around the 1.0750 level, while moves above 1.0800 have drawn selling interest.

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

Source: MNI - Market News/Bloomberg

  • Other indicators are pointing to less downside for the cross. This was signified this morning with the poor NZ ANZ business activity print. The second chart below plots the difference between the AU NAB business conditions measure and this NZ activity index. Note the latest observation in the chart assumes an unchanged NAB business conditions reading for November.
  • It may take a more dovish RBNZ backdrop to re-establish the relationship between the cross and relative business conditions. This may take some time given the RBNZ's focus on bringing inflation down (even if it comes at the expense of the growth backdrop).
  • Still, other indicators, like the relative terms of trade backdrop, are also pointing to a less downside in the AUD/NZD cross, which may be helping slow the rate of descent in the pair.

Fig 2: AUD/NZD Versus Relative Business Conditions

Source: ANZ/NAB/MNI - Market News/Bloomberg

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