Westpac: RBA Vs RBNZ Or Commodity Divergence?

Westpac note that "relative interest rates and relative trade performances tell very different stories for Australia and New Zealand and thus have made forecasting AUD/NZD even more difficult than usual."

• "On the trade side, New Zealand's export commodity prices have risen substantially over the past 12 months. But Australia's more industrial-focused commodity export basket has seen spectacular price rises, producing soaring trade surpluses."
• "Indeed, Australia's August trade surplus of A$15.1bn was a record high and the 44th consecutive month of surpluses. These have driven Australia's current account position into surplus since Q2 2019, with Q221 a record high A$20.5bn."
• "In contrast, New Zealand's trade balance has returned to familiar deficit. However, some of this reflects resilience in demand for imports, with NZ's domestic spending mostly stronger than Australia's in recent years."
• "This brings us to why the RBNZ has already raised its cash rate once from the pandemic lows and is expected to keep hiking in coming quarters – less spare capacity, driving inflation and wages."
• "AUD/NZD has been volatile of late but yield spreads seem to be generally the key driver, suggesting near term risks to below NZ$1.0400, even as far as NZ$1.0300. But our year-end forecast remains NZ$1.06 and our fair value model sits around NZ$1.10."