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FX | Economy

FX Focus - AUDNZD – The Battle Of The Antipodeans

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Forecast Spot 0 - 3m 6 - 12m Long-term
AUDNZD 1.0865 1.0830 1.1035 1.1345

*Forecasts as of April 2024.

 

  • The AUDNZD cross remains resilient around the 1.0850-80 area after having risen since late February due to the outperformance of the Australian economy versus New Zealand. But given the high domestic inflation in NZ, markets are pricing a higher terminal rate of 4.5% for the RBNZ by the end of H1’25 compared to 3.75% for the RBA with both central banks expected to commence their rate cut cycle towards the end of 2024. The more attractive rates in NZD however are unlikely to reverse the recent outperformance of AUD against NZD.
     
  • This is because current RBNZ policy is much more restrictive amid an economy that is underperforming with 4 of the past 5 quarters producing flat to negative quarterly GDP growth. In that time through the year, NZ growth has eased from 2.2% to -0.3% and in year-average terms, growth has decelerated from a respectable and arguably trend rate of 2.4% in 2022 to a post-pandemic low of 0.6% in 2023 leading Citi Economics to lower their forecast for NZ GDP growth from 1.1% to 0.9% in 2024. More concerning for NZ policymakers is NZ real household consumption growth that is now expected to be flat this year (down from 0.7% previously) given the greater vulnerability of NZ households to higher mortgage rates as more than half of NZ mortgagees roll-over this year to variable rates (compared to 20% of mortgagees in Australia). Meanwhile, Australia is seen as a tale of two-halves this year with household consumption expected to pick up in H2’2024 thanks to fiscal stimulus (stage 3 tax cuts) and still positive wealth effects from rising house prices, leading to an acceleration in consumption growth in H2.
     
  • Hence, Citi Economics, while expecting only one rate cut from the RBNZ in late 2024, forecast the cut to be 50 rather than 25bp with an accelerating rate cut cycle in H1’2025 (a further 125bp in cuts to a terminal rate of 3.75%). The RBA is also expected to also cut once in late 2024 but by only 25bp with little follow through in H1’2025 to a 4.1% terminal rate. Citi Economics forecasts therefore imply a higher terminal rate for the RBA relative to the RBNZ by the end of H1’2025 that is likely to be more supportive of AUD against NZD.
     
  • The external outlook is equally concerning for NZ with its terms of trade recently declining relative to Australia, following a series of underwhelming dairy auctions. Meanwhile, Australia’s terms of trade are now rebounding as iron ore prices pick up once again due to the inventory drawdown in China that commenced at the beginning of April. Taking a medium- term view, a potentially sizeable narrowing in AUD-NZD yield differentials coupled with Australia’s terms of trade outperformance potentially points to a further divergence in the performance of the Australian economy versus New Zealand in favor of the former which could potentially further spill over into the relative performance of AUD against NZD.

 

AUDNZD – Greater Divergence Between RBA and RBNZ Yet To Be Discounted Into The Pair 

Source: Bloomberg, April 18, 2024

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MARKET SPECIFIC DISCLOSURES

Market Specific Disclosures

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This communication is for general information only, is not intended as a recommendation or an offer or solicitation for the purchase or sale of any products or services and should not be relied upon as financial advice. The information herein
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