Can the drop in AUD/NZD continue?
The firm argues that the pair should continue to fall towards 1.02 as diverging economic conditions in Australia and New Zealand should see the 1-year OIS spread (the spread between the overnight swap rates) between the two widen further.
According to CBA chief currency strategist, Richard Grace:
"An improvement in NZ economic activity is occurring at the same time as Australian economic activity remains weak. The 1-year OIS rate spread has declined to -39 bps, reflecting the recent change in relative economic conditions, and the risk is the spread further declines to -50 bps, lowering AUD/NZD below 1.02."
Further adding that the Australian economy will undershoot the RBA's mandated goals and that the central bank will lower the cash rate to 0.50% in February and 0.25% in August.
If you're wondering what they are talking about with the overnight swap rates, here's a better illustration of that (spread today is -42 bps, widest since 2016):
It is historically one of the more relevant factors when you're keeping an eye on AUD/NZD but it tends to only matter more when there is a period of divergence in the fundamentals between Australia and New Zealand - or at least that is my take.
Even if you put that aside though, their narrative is hard to argue with. New Zealand economic data is somewhat outperforming that of Australia right now and the RBNZ seems to be in a better spot to stay on hold as such as compared to the RBA.
However, the kiwi dollar is running up against some key resistance levels in the likes of NZD/USD and NZD/JPY today. Hence, that is something to consider as well in case of a pullback after recent gains in the past week.
But if AUD/NZD can keep up its momentum below 1.05, it could still underpin the kiwi to push forward with more gains as we look to wrap up the year.
