FxWirePro: Driving Forces of APAC FX bloc, Stay Shorts in AUD/NZD on Upgradation of Kiwis Owing to Central Banks’ Convergence

The central bank rhetoric has surprised in favor of a stronger AUD in the previous months, but rate differentials haven’t really moved much. The Fed's strikingly dovish tone coupled with support from commodity prices and a sense that Chinese growth is puzzling Aussie.

Fed's dovish rhetoric now sees the US front end priced for cuts, but as the above chart illustrates, the AUD front end has also repriced too (despite a relatively sanguine outlook from the RBA). 

All up, this has left front end rate differentials largely unchanged in the past three months, and AUDUSD little changed too. As we noted in a recent research piece, it is rate differentials that matter the most for AUDUSD in the short term, and so it seems correct not to expect too much from the currency given the lack of directionality in rate spreads of late.

AUDUSD tracking lower over the course of 2019, although a move sub USD0.70c now seems likely to occur somewhat later than we outlined in our 2019 outlook in November.

We now forecast AUDUSD at 0.71c by Jun-19 (prior forecast was 0.69c). Our year-end target remains unchanged at USD0.68 levels.

AUD underperformance over the past six months is mainly due to the cooler outlook for global growth, with China especially in focus, and also growing expectations of RBA rate cuts. While AUDNZD is extremely undervalued, according to interest rates and commodity prices, mis-valuations can persist for a long time (e.g. over a year in 2016).

AU economic data momentum has slowed (Q4 GDP and retail sales were disappointing in the recent past), adding fuel to expectations the RBA will cut the cash rate this year. change In February, we’ve seen the changes in the projections from various analysts, from status quo-to -50bps cuts. That should render more downside pressure on the AUD than the NZD. The AU data calendar is quieter next week.

Overall, the both minor and major trend of AUDNZD has been weaker, we could foresee more slumps on cards if it breaches below 1.0333 level decisively and that seems most likely event. On hedging grounds, long-term investors are advised to stay short in futures contracts of AUDNZD of mid-month tenors. The writers of the futures contract are expected to maintain margins in order to open and maintain a short futures position. Courtesy: JPM & Westpac

Currency Strength Index: FxWirePro's hourly AUD spot index is inching towards 54 levels (which is bullish), while hourly NZD spot index was at 169 (highly bullish) while articulating (at 10:43 GMT).

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex