Australian Dollar: Peak risk builds against NZD – Societe Generale

Societe Generale’s Kenneth Broux and colleagues note that the Reserve Bank of New Zealand (RBNZ) held rates at 2.25% but turned more hawkish, while Australia’s softer Consumer Price Index (CPI) and underwhelming jobs data have markets trimming Reserve Bank of Australia (RBA) hike expectations. They argue AUD/NZD has likely peaked, with narrowing RBA/RBNZ rate differentials pointing to a cheaper cross and a potential break below 1.2130 opening 1.20.

Cross seen destined to cheapen

"Elsewhere in G10, the RBNZ earlier today left the OCR unchanged at 2.25% but turned hawkish. With the RBA cycle nearly complete, the obvious question for FX is whether AUD/NZD has or is in the process of peaking."

"Governor Breman’s casting vote was instrumental in today’s hold after the MPC split 3-3. The statement signalled that the key rate will most likely need to increase sooner and by more than envisaged in February."

"It also laid out three different scenarios and assumptions for oil prices/demand in which the OCR could rise to (a) 4.3% - higher global oil prices and persistent price behaviour, (b) 3.6% - higher global oil prices and restrained pricing behaviour and (c) monetary policy remains accommodative with OCR on hold at 2.25% in near term due to weaker global and domestic demand. "

"The money markets are fully pricing a total of five rate hikes by in the next 12 months with next 25bp hike fully priced by September. In Australia, CPI slowed more than forecast to 4.2% yoy in April from 4.6% in March but core rose a tick to 3.4% yoy. This follows the underwhelming employment report last week and money markets are trimming odds of a fourth rate increase by December to 80%."

"AUD/NZD retreated from the 13-year high and the prospect of narrowing RBA/RBNZ rate differentials is a signal that the cross is destined to cheapen. A break below 1.2130 (50dma) opens 1.20."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)