AUD & NZD to move sideways in the near-term - HSBC

Analysts at HSBC expect both AUD and NZD to move mostly sideways in the month ahead as there are a number of offsetting forces that will likely keep these currencies trapped and the AUD-NZD in its new-found 1.08-1.10 range.

Key Quotes

“The downside risks for NZD are possibly larger given it is still challenging support at 0.70 against the USD. A break could see an accelerated down-move.”

“For AUD, the most pertinent bearish force is likely to be commodity prices, which have lost much of the upward momentum so far in 2017 and began to move lower in March. Australia’s own commodity basket has been soft, dragged lower by a drop in iron ore prices among others. The pull back in prices generally is small compared to the run-up during H2 16, but it is a change in direction that challenges the AUD given its comparatively lofty level. However, as a factor, it is not enough to prompt a forecast of a swift AUD decline. Asian economic data continues to surprise on the upside, and the migration of the Trump policy agenda towards tax reform (and associated reflation expectations) may also prompt some support for commodities and the AUD.”

“Any commodity-related tactical downside for the AUD should also be offset by a tempering in the market’s increasingly dovish expectations for rates. The market has cut 16bp from its expectations for where rates will finish 2017 since the start of the year, and the buying of interest rate futures picked up against in recent weeks. We suspect the RBA will retain a studiously neutral stance at its April meeting and likely retain the same tone at its meeting in early May when it will also have the benefit of Q1 CPI numbers. In addition, the AUD could be supported by any heightened RBA nervousness over the strength of the housing market.”

“From a policy perspective, the RBNZ should also be a neutral force for the NZD. At its last meeting it made it clear that it would look through the temporary and offsetting influences of weaker-than-expected GDP data but a likely higher print for Q1 CPI on the back of food prices. Our economists expect no change in policy this year. However, their continued discomfort with the high level of the NZD will remain a headwind to NZD advances even if policy goes nowhere. Despite recent welcomed weakness, the RBNZ said that “further depreciation is needed.”

“We suspect the tone of the RBNZ regarding the currency, which is in contrast to the RBA’s relative comfort with the AUD, explains why the AUD-NZD cross has moved higher than would seem warranted by relative rate expectations. Looking at the 1Y1Y forward differential, for example, would suggest the cross should be back below the 1.08 support level already. For us, the mismatch is sufficient to at least assume the cross will not break above 1.10.”