AUDNZD: The reversal may not be over yet – TDS

Mazen Issa, Senior FX Strategist at TDS, notes that after months of trading sideways, AUDNZD has finally broken out of its 1.02/1.08 range and has admittedly occurred earlier than they expected as they have been targeting a move towards 1.14 by year-end as triangulated per our forecasts.

Key Quotes

“After multiple failed attempts, the cross punched through key resistance in the 1.0750/0800 zone, suggesting it could be in the process of forming a reverse head and shoulders. This area should act as key support for dip buyers, for now. Despite the surge, upside risks towards 1.12 remains, in line with the 2013 lows and 2015 highs.”

“Relative data surprises: The recent leg higher comes as relative data surprises have moved in favor of the AUD and strongly against the NZD. While this correlation has ebbed and flowed, it broadly coincides well with AUDNZD. We note that the AUD labor market remains a concern, however, amid surging part-time jobs and tepid full time hours worked.”

“Policy Divergence Risk: As expected, the March RBA was a staid affair but the market may be underappreciating monetary policy divergence between the RBA/RBNZ. We look for the RBA to follow the Fed as one of the first central banks to tighten. We see this in Q4 on simmering financial stability risks. Meanwhile, the RBNZ has reaffirmed its commitment to keep the cash rate low for long. Additionally, the AUD terms of trade shock has dissipated, implying higher national incomes while our monthly inflation gauge also suggests a rebound in quarterly inflation metrics soon. Despite this, the OIS market remains reluctant to price these risks. With the Fed seen hiking three times this year and in light of our broadly constructive view of the USD for the next few months, we think AUD will struggle vs the USD (we are short) but prone to outperform the NZD.”

“Cross-Kiwi supply & positioning risks: Over the immediate horizon, AUDNZD could be driven higher by idiosyncrasies in the NZD-leg. CFTC data points to longNZDUSD positioning by the leveraged community at historic highs at 57% of open interest. While its recent underperformance has likely helped to reduce the overhang of NZD longs, the process is likely to be incomplete; another positioning washout is probable, we think, as other NZDcrosses are trading near key technical thresholds. NZDJPY, for example, has already broken through the crucial 80.00 level, but we are particularly keen on NZDUSD. This has stalled right at trendline support established from the 2015 cyclical lows. We are already short this pair in our core model portfolio with a target of 0.6675.”