AUD/NZD Headed for 1.06?

AUD/NZD Headed for 1.06?

AUD/NZD Headed for 1.06?

The Australian and New Zealand dollars both traded lower today and looking ahead we expect NZD to continue to outperform AUD. The Australian dollar has been driven lower by the RBA’s dovish bias and the recent decline in iron prices. The price of one of Australia’s most important commodities has fallen 23% over the past month, validating and now increasing the pressure on the RBA to ease again. In Australia, some economists are talking about another 75bp reduction but we think 25bp is more likely. Either way, the currency is vulnerable to additional weakness on the back of next week’s Reserve Bank of Australia minutes. When the central bank last met they felt inflation was such a problem that they needed to act immediately. This urgency is likely to be echoed in Monday night’s report. The New Zealand dollar also came under selling pressure after weaker than expected retail sales growth in the first quarter. Consumer spending grew 0.8% in the first few months of the year, which was lower than the downwardly revised 1.1% reading for Q4. While New Zealand data hasn’t been great, recent comments from NZ policymakers have reduced the chance of near term easing. Central Bank Governor Wheeler expressed concerns about house prices in Auckland while Finance Minister English promised to bring forward spending from 2017 to 2016, reducing the need for monetary stimulus.

Technically, AUD/NZD is oversold but if the currency pair rallies to 1.0800-1.0850, it would be an attractive sell. The 100 and 200-day SMAs should cap gains above 1.0900 whereas a move below 1.0700 paves the way for a deeper correction that could take the pair below 1.06.

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