Relative Current Accounts Offsetting Lower Yield Spreads To Some Degree

The AUD/NZD cross is slightly higher in early dealings, with the pair last near 1.0730. We got close to 1.0740 earlier, with NZ's weaker than expected Q4 current account position weighing on NZD at the margins. See this link for more details, but NZ's current account is among the weakest in the OECD.

• The chart below overlays the AUD/NZD cross against the AU-NZ current account differential (as a % of GDP). There can be meaningful divergences between the two series, with the current backdrop a case in point, where the cross should be materially higher.
• Still, the relative balances may be one factor why the cross hasn't weakened as much as implied by rate differentials in recent weeks. It should also leave the AUD more resilient to external shocks, relative to NZD, all else equal.
• Of course, tomorrow delivers two important data outcomes in both countries with NZ Q4 GDP due (the market expects a -0.2% contraction), along with AU Feb employment (+50k forecast). These outcomes can obviously dominate near term AUD/NZD sentiment.
• In terms of levels, bears now target the 76.4% retracement of the Dec-Feb bull leg ($1.0617), a break through there opens 2022 lows at $1.0471. Bulls target the 20-Day EMA ($1.0830) to turn the tide.

Fig 1: AUD/NZD Versus AU-NZ Current Account Differential (% of GDP)

Source: MNI - Market News/Bloomberg