Popular Aussie-Kiwi cross to test year’s high on policy outlook

INVESTORS see the Australian dollar testing this year’s high against its New Zealand counterpart as policymakers diverge on the interest-rate outlook.

The currency pair closed at 1.1049 last week, and Westpac Banking forecasts that it will reach 1.1150 by the end of December, near this year’s peak of 1.1152. National Australia Bank (NAB) said it may climb as high as 1.15 next year.

Interest-rate differentials are emerging as a key driver for the currency pair as the Reserve Bank of Australia (RBA) defies a global shift to easing in an attempt to rein in inflation. In contrast, the Reserve Bank of New Zealand (RBNZ) is expected to follow up on its recent half-a-percentage point rate cut with another big reduction at its meeting next month.

“The cross is a popular long trade with the macro community because it capitalises on a pretty major policy fault line in the G10 (Group of 10),” said Westpac’s head of FX strategy Richard Franulovich. “The RBA and Bank of Japan are the only G10 central banks that are not cutting rates, while the RBNZ’s forward guidance have markets pricing in more cuts in the year ahead than anywhere else.”

The currency pair has been stuck in a range of 1.10 to 1.11 this month as its rally stalled with traders now looking for the next cue to push it higher.

Australia’s inflation data due Wednesday (Oct 30) may help to determine the pair’s near-term direction. Deputy governor Andrew Hauser said this month the RBA’s strategy is to bring CPI down slowly to protect the labour market, and added that inflation in Australia is still “too high”. As a result, he said, RBA rates will not fall as much or as early as those of other central banks.

New Zealand’s jobs data due early November will also be key as the report is likely to reinforce expectations for more outsized rate cuts, according to Westpac’s Franulovich. The RBNZ began lowering its Official Cash Rate in August and markets are pricing in some risk of a 75 basis-point move in November.

“Anticipation of an aggressive RBNZ easing cycle and much delayed, shallower RBA cycle, means we have had a AUD/NZD forecast of 1.12 next year for a while,” said Ray Attrill, Sydney-based head of FX strategy at NAB. “But it’s not difficult to justify a significantly higher level, for example, nearer 1.15.” BLOOMBERG