AUD – Range to hold – NZD Outlook

From the FXWW Chatroom: Strong employment print pushing AUD higher on the crosses

AUD has rallied roughly 2% against the USD, 1% on the TWI in the last 10 days highlighting near-term support for the currency. Better than expected econ data (GDP, employment) and RBA’s sanguine view at the June policy has helped dissipate the bearish sentiment on AUD.

While this was expected as we believed market bearishness was overdone, it may be hard for the AUD to significantly extend these gains from here. Iron ore remains weak and is likely to continue to weigh on ATWI (Fig 1).
China data yesterday offered little to cheer for AUD and iron ore. Fixed asset investment growth, which shows strong relationship with AUD, slowed down bit further to 7.8% y/y in May from 8.1% prev.

We expect AUD-USD to remain range bound. Topside trend-line resistance come in around 0.7725.

Also given Fed o/n was more hawkish than expected, I believe AUD/NZD is a better expression of bullish AUD views here. More on NZD below

NZD –  Expect RBNZ to remain dovish on currency next week

Very briefly, RBNZ is meeting next week on June 22.

NZD TWI has rallied (again!) 4% since RBNZ’s May meeting, despite soft dairy prices (Fig 3). Unlikely to please the RBNZ

Data in the meantime hasn’t been good either. Another weak GDP print this morning (0.5% q/q vs 0.7% expected).

A RBNZ bulletin published short-while back highlights that inflation pressures in the current economic expansion have been less muted in the past (and less than what the RBNZ prev feared). Please see excerpts below. Overall supports RBNZ’s stance of being patient with the policy tightening. Market is still pricing first hike in H1-2018, much sooner than RBNZ projections.

We believe NZD risks are tilted to the downside going into the RBNZ next week.

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