Westpac: RBA Policy Shift Weighing?

Westpac note that "in August AUD/NZD spent time above NZ$1.10 for the first time since 2018, but the pair has since struggled. Some of the pullback seems likely to be due to the Aussie's greater sensitivity to global risk appetite, after global equities tumbled in September. The relationship between equity sentiment and AUD/NZD historically has been fluid, but this year at least the AUD seems to have been the preferred proxy for risk. With this in mind, our base case of a risk-friendly 'Blue Wave' US election should help AUD/NZD track higher into year-end. Relative commodity prices are also supportive, helping Australia print ongoing trade surpluses. The Aussie has however lost some shine on the RBA outlook, with markets braced for not just rate cuts but substantial QE at the Nov meeting. However, the RBNZ continues to prepare for a negative cash rate in 2021, and Westpac expects a cheap bank funding scheme to be announced at the November meeting. Near term, AUD/NZD losses could extend to the NZ$1.05 handle. But into year-end, renewed focus on RBNZ easing in 2021 and a positive global risk mood should help reduce AUD/NZD undervaluation versus fair value, rallying to NZ$1.12."