RBA/RBNZ Monetary Policy Divergence

The next 48 hours will provide some further clarity in regards to monetary policy outlooks in Oceania. Recent data divergence between Australia and New Zealand has weighed on AUD/NZD as tightening expectations have been scaled back for the former and ramped up for the latter.

Australia Q2 Consumer Prices are set for release at 21:30 ET with the consensus of Bloomberg economists expecting rises of +0.7% (QoQ) and +3.4% (YoY). In the latest RBA meeting minutes, policymakers stated that the upcoming quarterly CPI release lsquo;is important in helping to shape views about inflation, and therefore the future path of interest rates while shifting towards a more neutral stance by omitting previous comments that rate hikes would be required at some point. Unless consumer prices surprise substantially to the topside, the RBA is likely to maintain its current outlook as core inflation sits comfortably within the central banks 2-3% target range.

The RBNZ is set to announce the Official Cash Rate (OCR) tomorrow and market expectations are for the OCR to be held steady at 2.50%. Recent economic data has printed higher than expectations and last weeks release of Q2 consumer prices did not buck the trend NZ CPI increased +1.0% vs. consensus estimates of +0.8% (QoQ) and +5.3% vs. expected +5.1% (YoY) suggesting accommodative OCR levels may no longer be appropriate.

We think the RBNZ will keep policy on hold, but believe accompanying statements may maintain a hawkish tone – the central bank noted that removal of policy accommodation would be determined by the lsquo;speed of the recovery. However, the one caveat to this is the rapid Kiwi appreciation as of late NZD/USD has skyrocketed to record highs just above the 0.8700 figure gaining more than 5% since June and exists as the main risk to more hawkish RBNZ rhetoric.

Overall, the risks remain skewed for further RBNZ and RBA monetary policy divergence as NZ CPI is well above the RBNZs 2-3% target while AU CPI remains within the RBAs target range barring a significant topside surprise in todays release.

The technical outlook in AUD/NZD confirms the diverging fundamentals between the Oceanic neighbors:

• Multiple daily closes below primary trend-line from the 1.0640/45 2008 multi-year lows.
• Hamp;S neckline break around the 1.2800 figure has a measured move objective towards the key 1.2000 pivot.
• 3000 pip range since 1995; Hamp;S measured move objective projects to the range midpoint around the aforementioned 1.2000 pivot.

Considering USD risks stemming from the ongoing US debt ceiling debate, it may be appropriate to seek out opportunities in non-USD based currency pairs. That said, better economic data and heightened inflation expectations suggest NZD may outperform AUD independent of whether future developments lead to USD strength or weakness. Accordingly, we think any remaining AUD/NZD strength into the 1.2900/1.3000 zone may provide positive risk/reward value for shorts with stops around 1.3350 and limit targets around 1.2100

Tags : Monetary
Categories : Monetary