Westpac Aiming Higher Multi-Week

Westpac note that AUD/NZD "fell steadily from above NZ$1.10 in August to nearly NZ$1.04 early Dec, with fuel from New Zealand's strong economic rebound which stoked expectations that despite all the preparation, the RBNZ would not adopt a negative cash rate after all. Partial data showed broad strength in the NZ economy as reopening proceeded without much covid interruption and the housing market bubbled. Markets stopped pricing in a negative cash rate after the RBNZ's 11 Nov meeting where the tone was more upbeat. Australia's economy has also mostly beaten expectations in its recovery since mid-2020, including unexpected resilience in retail sales and employment in Victoria. But in Nov the RBA cut its key interest rates and announced an aggressive program of A$100bn bond purchases over just 6 months. But the contrast in perceptions of relative monetary policy seemed to reach its peak in Nov and since the RBA's on-hold Dec decision, AUD/NZD has recovered strongly, shrinking our estimates of undervaluation. While NZ dairy prices have trended higher, Australia's trade position is much stronger, aided by China's industrial-led rebound, iron ore prices reaching 9 year highs. Despite the correction of recent days, we see the upswing extending to NZ$1.1050 multi-week."