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.

AUD/NZD
IG Charts

IGA, may distribute information/research produced by its respective foreign marketing partners within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

This information/research prepared by IGA or IGA Group is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. In addition to the disclaimer above, the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.

See important Research Disclaimer.