Westpac: Fair Value Shifts Lower On Central Bank Outlooks, Supportive Inputs Seen Further Out

Westpac write “divergence in policy stances between the RBA and RBNZ have driven sharp swings in the AU/NZ 2-Year swap spread since the pandemic, mostly skewing in the Kiwi’s favour.”

• “The spread blew out from around -60bp in Sep 2022 to beyond -150bp in mid-Dec 2022, at which point AUD/NZD was probing the NZ$1.05 area. “
• “The spread narrowed in Jan-Feb 2023, when Q4 CPI was a little firmer than expected in Australia and somewhat muted in NZ. The narrowing extended to about -105bp with help from the RBA’s hawkish Feb statement.”
• “Since then AUD/NZD has been undermined by the RBA’s switch back to a dovish lean in Mar and Apr, aided by the slowing in Australia’s monthly CPI series. In stark contrast, the RBNZ delivered a major surprise at its Apr meeting, hiking 50bp. We now look for its cash rate to peak at 5.50% vs 3.85% for the RBA.”
• “The plunge in the 2-Year spread has slashed our estimate of AUD/NZD fair value to NZ$1.04. Near term, momentum could take the pair to NZ$1.0530, even as far as NZ$1.0470 multi-week.”
• “Still, Australia’s external position remains much stronger, running large trade surpluses while NZ’s current account deficit expanded beyond -7% of GDP in 2022. AUD/NZD should benefit from accelerating China growth in H223.”