AUD USD / AUD NZD - FUNDAMENTAL DRIVERS
Foreign exchange analysts at BNP Paribas suggest a bullish outlook for the AUD/USD and AUD/NZD exchange rates, citing global market stabilisation, the divergence between the Reserve Bank of Australia (RBA) and the Reserve Bank of New Zealand (RBNZ), housing market vulnerabilities, and seasonal performance in risky assets.
Global Markets Stabilizing and Impact on Exchange Rates
FX strategists at the French international banking group highlight that global markets have stabilised following financial stress in the financial sector. This stabilisation is expected to lead to a broad weakening of the USD and a recovery in equity-sensitive currencies trading near recent lows, such as the Australian Dollar to US Dollar exchange rate.
"Over the coming weeks, we see scope for equity-sensitive currencies trading near recent lows, such as AUDUSD, to recover in line with a broad weakening of the USD."
Global Risk Premium Index and Seasonal Performance
Saimbi points out that the BNP Paribas global risk premium index is at high levels, suggesting investor appetite is excessively low and therefore that risk-reward is attractive to add risk-on positions.
Additionally, BNP Paribas's seasonality analysis shows that in early April, risky assets tend to perform well, which may have a positive impact on the AUD/USD exchange rate.
"BNP Paribas’s seasonality analysis finds that in early April, risky assets tend to perform well."
Momentum to Sell USD
Saimbi indicates that recent data have led the market to further price out Fed tightening, and the USD's reaction to downside surprises has been marked. As a result, there is an appetite to build USD shorts, which may lead to a fast rally in the AUD/USD exchange rate.
"We believe this suggests the market could have a good appetite to build USD shorts here."
RBA and RBNZ Divergence
The divergence between the Reserve Bank of Australia (RBA) and the Reserve Bank of New Zealand (RBNZ) in terms of policy rates is a fast-growing theme in the FX markets. The RBA has kept policy rates unchanged at its last meeting, and Governor Lowe has suggested that rate increases are not over. In contrast, the RBNZ has been more hawkish, with markets pricing in a large degree of divergence between the two central banks.
"This means the market’s pricing for such a large degree of RBA divergence from the RBNZ may not be realised, especially considering its inflation projections are remarkably similar."
Housing Market Vulnerabilities
According to the analyst, the divergence between the RBA and RBNZ is even more unjustified when considering risks to Australia's economy from the housing market. Australia still has relatively large excess savings buffers accumulated during the pandemic, and debt service ratios may have only risen to pre-pandemic average levels.
"We find a smaller proportion of lower earners in Australia than elsewhere."
Australian Dollar Exchange Rate Forecasts
Saimbi suggests that with markets pricing in only about a 20% chance of a further 25bp hike from the RBA at the moment, risks appear more asymmetrically skewed to the upside. In contrast, the more hawkish RBNZ meeting (5 April) presented an opportunity to sell NZD.
The analyst recommends going long on the Australian Dollar to US Dollar exchange rate (AUD/USD) and the Australian Dollar to New Zealand Dollar exchange rate(AUD/NZD). This implies a bullish outlook for the AUD against the USD and NZD currencies.
"We think the pullback in AUDNZD presents an opportunity to buy the cross, given that we think the divergence currently priced in between the RBNZ and RBA is not likely to prove sustainable, especially as we judge New Zealand’s housing market to be more vulnerable than Australia’s."
Global Markets Stabilizing and Impact on Exchange Rates
FX strategists at the French international banking group highlight that global markets have stabilised following financial stress in the financial sector. This stabilisation is expected to lead to a broad weakening of the USD and a recovery in equity-sensitive currencies trading near recent lows, such as the Australian Dollar to US Dollar exchange rate.
"Over the coming weeks, we see scope for equity-sensitive currencies trading near recent lows, such as AUDUSD, to recover in line with a broad weakening of the USD."
Global Risk Premium Index and Seasonal Performance
Saimbi points out that the BNP Paribas global risk premium index is at high levels, suggesting investor appetite is excessively low and therefore that risk-reward is attractive to add risk-on positions.
Additionally, BNP Paribas's seasonality analysis shows that in early April, risky assets tend to perform well, which may have a positive impact on the AUD/USD exchange rate.
"BNP Paribas’s seasonality analysis finds that in early April, risky assets tend to perform well."
Momentum to Sell USD
Saimbi indicates that recent data have led the market to further price out Fed tightening, and the USD's reaction to downside surprises has been marked. As a result, there is an appetite to build USD shorts, which may lead to a fast rally in the AUD/USD exchange rate.
"We believe this suggests the market could have a good appetite to build USD shorts here."
RBA and RBNZ Divergence
The divergence between the Reserve Bank of Australia (RBA) and the Reserve Bank of New Zealand (RBNZ) in terms of policy rates is a fast-growing theme in the FX markets. The RBA has kept policy rates unchanged at its last meeting, and Governor Lowe has suggested that rate increases are not over. In contrast, the RBNZ has been more hawkish, with markets pricing in a large degree of divergence between the two central banks.
"This means the market’s pricing for such a large degree of RBA divergence from the RBNZ may not be realised, especially considering its inflation projections are remarkably similar."
Housing Market Vulnerabilities
According to the analyst, the divergence between the RBA and RBNZ is even more unjustified when considering risks to Australia's economy from the housing market. Australia still has relatively large excess savings buffers accumulated during the pandemic, and debt service ratios may have only risen to pre-pandemic average levels.
"We find a smaller proportion of lower earners in Australia than elsewhere."
Australian Dollar Exchange Rate Forecasts
Saimbi suggests that with markets pricing in only about a 20% chance of a further 25bp hike from the RBA at the moment, risks appear more asymmetrically skewed to the upside. In contrast, the more hawkish RBNZ meeting (5 April) presented an opportunity to sell NZD.
The analyst recommends going long on the Australian Dollar to US Dollar exchange rate (AUD/USD) and the Australian Dollar to New Zealand Dollar exchange rate(AUD/NZD). This implies a bullish outlook for the AUD against the USD and NZD currencies.
"We think the pullback in AUDNZD presents an opportunity to buy the cross, given that we think the divergence currently priced in between the RBNZ and RBA is not likely to prove sustainable, especially as we judge New Zealand’s housing market to be more vulnerable than Australia’s."