HSBC turned bullish on AUD and NZD a little earlier:

  • Forecasting the AUD and the NZD remains a cyclical game
  • We think the rules are the same as when we turned bullish on these currencies in September
  • As a result we still see AUD-USD and NZD-USD rising by 7-10% in 2018 as the RBA and RBNZ move towards monetary policy normalisation.
  • Instead, the downward tweaks to our spot forecasts reflect a lower starting point for these currency pairs than we had envisaged.
  • Largely, this comes from the USD side, given the rise in US yields since the start of September that has dragged 2yr NZ-US yield differentials to 17-year lows and turned AU-US yield differentials negative all the way up to 5yr maturities

Their new forecasts:

More (in brief) ...

Looking ahead

  • US rates may still be marginally under-priced against our expectations, posing a small upside risk for the USD,
  • the pricing appears much more out of line for the AUD and NZD
  • cash rate expectations have barely budged, remaining much more dovish than our economists' forecasts for hikes around the middle of 2018
  • An unpreparedness for "lift- off" can be seen as clearly in FX, where the NZD is weaker and the AUD largely unchanged in trade weighted terms from when their respective central banks last cut rates back in 2016, despite the lift in key export commodity prices in the interim
  • If both central banks turn the corner in 2018, the upward currency adjustment is likely to be particularly sharp given a likely absence of forward guidance