Westpac: Hawkish RBNZ Weighs On The Cross

Westpac note that "for some time we have highlighted the upside potential of AUD/NZD given the relative strength of Australia's and New Zealand's respective trade positions. Q2 will have been Australia's 9th consecutive quarter of current account surpluses, easily a record since at least the 1950s. June will be Australia's 42nd consecutive monthly trade surplus."

• "In stark contrast, Westpac forecasts New Zealand's current account deficit to widen to -5% of GDP this year. Such a divergence points to AUD/NZD trading around NZD1.09-1.10."
• "However, relative yields are often more potent in driving substantial movement in AUD/NZD. Australia's 2-Year swap yield has been below New Zealand's for much of the past 8 years."
• "More recently, the sharpest moves in AUD/NZD have been in response to surprises from either RBA or RBNZ. In July the RBA revealed a monetary policy road map of a cautious QE taper starting in September. In contrast, at its July meeting, the RBNZ showed little sign of caution. QE was abruptly halted and markets now price >75bp of rate hikes by Q1 2022."
• "AUD/NZD fell from >NZD1.07 to the NZD1.05 handle in the wake of the RBNZ decision in July. The RBA's steady hand in August lent only fleeting support to A$, with a renewed slide in the cross following NZ's strong Q2 employment report, as markets priced in even more RBNZ tightening. Multi-week risks seem to be for a test of NZD1.0300."