AUD & NZD: Slowly but Surely

The hawkish tone of the 7 Feb RBA decision can bring new vigour to bullish AUD positions.

With less than 25bp of hikes priced at Mar and Apr meetings, I see scope for monetary policy to be a more AUD-supportive factor.

I hold my end-Q1 AUDUSD target unchanged at 0.7150 and trim my range from 0.6600-0.7300 to 0.6800-0.7300.

I also hold on to my 1.1200 AUDNZD target and set a stop loss on the view at my entry level of 1.0770.

While I still see the hypothesis of the RBNZ shifting less hawkish at its 22 Feb meeting as valid, the risks to the view have increased.

The Q1 RBNZ inflation expectations survey on 14 Feb is a key source of risk.

Hawkish RBA is a new supportive factor for AUD Bulls

The first few weeks of the year have been a true rollercoaster for AUD, as the currency rapidly went from early favourite in the first half of Jan, to overcrowded long by the end of the month, only to emerge as resilient survivor this past week, following the RBA’s hawkish rate decision on 7 Feb.

I have been constructive on AUD in Q1, holding a 0.7150 AUDUSD Q1 target, within a broader 0.6600-0.7300 range for the quarter.

I have also held a bullish AUD view in crosses, especially in AUDNZD where I hold a 1.1200 Q1 target.

And so far, I do not see an urgent need to change these views.

The RBA decision represents a constructive surprise relative to my outlook in early Jan.

The most notable surprise in the RBA statement from 7 Feb was the change in language around “further increases in interest rates”, which contributed to dispelling expectations of a non-committal monetary policy stance.

Since the beginning of the year, RBA policy had not figured amongst the driving factors behind AUD strength, with many in markets defaulting instead to the widely held view that rate resets on variable rate mortgages, driving a consumption slowdown, would keep the RBA from shifting hawkish.

The RBA statement represents a very significant pushback against this view and is a helpful development for my bullish AUD stance.

The fact that this also has happened right as investor euphoria about China re-opening started to ebb is also good news for AUD bulls.

Looking ahead, even after the most recent RBA decision, the market-implied policy outlook remains quite mixed, with most meetings up to July (which coincides with the terminal rate, now at ~3.90% vs ~3.70% last week) priced for less than 25bp worth of hikes.

This in my view creates potential for hawkish RBA surprises to persist as a driving theme of AUD price action in the near-term, at least as long as the data warrant it.

On that front, the next big data point will be the Q1 wage price index on 21 Feb, followed by the next big inflation print, Q1 CPI data, on 25 April – a particularly long stretch between now and the next major inflation checkpoint.

All in all, with the assumption of a squeamish RBA suddenly challenged and limited domestic data challenges to it on the near-term horizon, I see renewed potential for my constructive AUD stance.

In acknowledgement of having nearly reached the mid-point of the quarter, and mindful of the positioning build-up since the beginning of the year, I see it reasonable to tighten my target range slightly for the rest of Q1 from 0.6600- 0.7300 to 0.6800-0.7300, while maintaining a 0.7150 end-Q1 target.

I remain committed to fading moves to the extremes of the range.

RBNZ Rate Decision comes into Focus

This newfound RBA hawkishness also should in my view drive renewed interest in cross rate expressions where monetary policy divergences play a prominent role: AUDNZD is at the top of this list.

I have held a bullish stance and a 1.1200 target for the pair since the beginning of the year, and while price action has been generally in line with my views, the real test for the position will be in 2 weeks, when the RBNZ holds its first interest rate decision of the year, on 22 Feb.

OIS markets are pricing in now close to 50bp worth of hikes in Feb, down from closer to 75bp at the beginning of the year.

Interestingly, the consensus of analysts polled by Bloomberg for the meeting is still firmly in favour of a 75bp hike.

I suspect this might change as we near the meeting date.

My view has been since the beginning of the year that the RBNZ would hike 50bp at most in Feb, and so far, I do not have reasons to change, with the slowdown in non-tradable inflation and the easing in wage growth in Q4 backing my stance (released on 24 and 31 Jan respectively).

This said, it is worth acknowledging that market expectations for RBNZ rate hikes in the first half of the year have fallen from slightly below 125bp in early Jan to around 100bp.

Furthermore, markets have gone from pricing in only 25bp worth of cuts by year end to expecting almost 50bp worth of cuts from the terminal rate to year end.

In other words, the view that I had in early January seems to be playing out: while I welcome this, I also are alert to the fact that as we near the upcoming meeting, this creates risks of even modest data or policy surprises pushing in the opposite direction.

For this reason, having first going long AUDNZD at around 1.0770 on 4 Jan, I now opt to set a stop loss on the view at my entry level, while holding a 1.1200 target.

As far as key data points on the calendar between now and the 22 Feb rate decision go, the one to monitor will be the Q1 inflation expectations survey produced by the RBNZ, out on 14 Feb.

Both 1-year and 2-year ahead expectations have risen from 4.86% and 3.07% in Q3 to 5.08% and 3.62% in Q4: further increases in either survey result in Q1 would call into question the view that the RBNZ is set to slow down the pace of its rate hikes from 75bp to 50bp.

As such, this represents a key risk to my view.

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