FX Focus - AUDNZD – Australia’s Economy Likely To Outperform NZ

Among the antipodeans (Australia and NZ), Australia is still seen as a tale of two-halves this year with household consumption expected to pick up in H2’24 thanks to fiscal stimulus (stage 3 tax cuts) and  positive wealth effects from rising house prices. The outlook is supported by Australia’s jobs growth in 2024 with already 80k jobs added in trend terms between Q4’23 to Q1’24. This is likely the catalyst for an increase in wages and salaries in Q2 and later this year, following a 1.0% rise in Q1’24 even if the pace of jobs growth moderates. Citi Economics expect only a moderate loosening of the Australian labor market in H2’2024, implying a year-end unemployment rate of 4.3%, consistent with the non-accelerating inflation rate of  unemployment (NAIRU).
 

Australia’s labor market is being driven by demand for services and looks to be acclimating to higher official rates. Employment growth is likely to slow in H2’2024 to an unemployment rate closer to 4.3%, from the current 4.0% but which is still around estimates of full employment. The external outlook also remains healthy as Australia’s terms of trade rebound on the back of the overall resilience of iron ore prices to support China’s renewed purchases following its inventory drawdown.  With the Reserve Bank of Australia (RBA) likely the last to cut rates among its G10 peers, this puts AUD in a stronger position medium term, especially relative to its commodity peer NZD.
 

Turning to NZ, the Reserve bank of New Zealand (RBNZ) sounded hawkish in its May policy statement, warning of possibly higher rates despite acknowledging demand and supply are broadly in balance. The RBNZ indicated that consideration was given to lifting the overnight cash rate (OCR), saying - “members agreed that persistence in non-tradeables inflation remains a significant upside risk”. However, RBNZ also acknowledged several factors working to contain inflation. These included reduced capacity pressures, most measures of inflation expectations moderating, headline inflation expected to fall just below the top of the RBNZ target by year-end,  GDP growth forecasts to be lower (which now stands at just 1.0%) and employment to grind to a moribund growth rate of just 0.2%. In fact, Citi Economics expect a NZ recession alongside households still fixing to higher rates and retain their November 2024 start to the OCR easing cycle.  The RBNZ’s hawkish rhetoric therefore, looks more an attempt at additional jawboning than a signal to raise rates. NZ’s growth outlook and rates trajectory therefore look vulnerable to downside risks relative to Australia that could see the RBNZ forced into an earlier and deeper rate cut cycle than the RBA. Meanwhile, the rise in NZD’s trade weighted index (TWI) relative to AUD since May does not commensurate with the performance of NZ’s terms of trade relative to Australia. This leaves NZD vulnerable versus AUD from both a rates and terms of trade perspective.