Has a bottom been seen in AUD/NZD?

The RBNZ left rates on hold today, which was the consensus in the market, although the swaps market had priced in a 40% probability the RBNZ would hike.

The short statement was positive, with the central bank commenting that the economy has ‘considerable momentum’, while inflationary pressures are ‘expected to increase over the next couple of years’.  It also went as far as saying it is committed to raising the overnight cash rate as needed.

For me a March hike from the RBNZ is all but assured, however what isn’t so clear is whether the bank will hike the cash rate five times over the coming twelve months, and I really don’t see this happening. It’s these expectations that drive currencies and on this ground unless economics in Australia really deteriorate, I find it hard to see parity on the pair anytime soon.

On the other side of coin the RBA has all but done cutting, and I feel the bank is now on hold for the foreseeable future. In fact, the prospect the bank drops its easing bias in the February meeting is real, and this could have a sizeable psychological impact. The swaps market is totally neutral on rates as it stands, and pricing in an unchanged policy setting from the RBA over the coming year. The idea of policy divergence is slowly falling away and while we are some way from the RBA becoming hawkish, the idea that the macro trading community is going to continue pushing down the cross on growing policy divergence is ebbing away.

Technically the daily chart is showing positive divergence, with the ten-day RSI printing a higher high and the price recently printing a lower high. We have now seen both price and the RSI move higher, confirming the divergence and therefore I feel the pair can squeeze higher from here.

With the market pricing in aggressive hikes and divergence now confirmed on the daily chart, I would look to potentially buy AUD/NZD around 1.0600, with a potential stop near 1.0400 and a target of 1.1000.

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