AUD/NZD: Aussie medium-term outperformance against Kiwi intact supported by RBA

• Today’s RBA monetary policy decision statement has kept the possibility of a rate hike before 2024 ends “alive”.
• The narrowing of the discount between Australia-New Zealand sovereign bonds yield spread has supported the potential continuation of the AUD/NZD medium-term uptrend phase.
• Watch the key medium-term support of 1.0940 on the AUD/NZD.

The paths of inflationary trends between the two Antipodean countries have started to diverge in the past month.

Higher inflationary pressures in Australia versus New Zealand

Fig 1: Inflationary expectations of Australia & New Zealand with AU/NZ sovereign bond yield spreads as of 7 May 2024 (Source: TradingView, click to enlarge chart)

Forward-looking consumer inflation expectations in Australia have inched higher to 4.6% in April from 4.3% printed in March, its highest pace of increase since November 2023 amid elevated prices in services components. In contrast, New Zealand’s 2-year inflation expectations fell to 2.5% in Q1 2024, its lowest level since Q3 2021 from 2.76% recorded in Q4 2023 (see Fig 1).

Therefore, the Australian central bank, RBA has adopted a more cautious and prudent stance on its monetary policy guidance and opted to have a more hawkish tilt in keeping the doors open for a hike above the current policy cash rate at 4.35%.

RBA has kept the door open for a rate hike in 2024

RBA has chosen to maintain its policy cash rate at 4.35% in today’s monetary policy meeting for the fourth consecutive time, its highest level in almost 12 years. No major surprises and the tonality of the accompanying monetary policy statement is almost the same as the prior March’s meeting; the persistence of services inflation is a key uncertainty, some time is required for inflation to hit the target range of 2% to 3%, vigilant to upside risks, and not ruling anything in or out on future decisions are the key takeaways.

During RBA Governor Bullock’s press conference, she reiterated the key takeaways from the current momentary policy statement and added that current market pricing on the cash rate futures is “reasonably balanced” which implies that an RBA rate hike before 2024 is still a “live” event as the cash rate futures has priced in an implied yield of 4.43% on the September and October 2024 contracts as of 6 May 2024, above the policy cash rate of 4.35% by 7 basis points.

Bullish breakout in AUD/NZD

Fig 2: AUD/NZD major & medium-term trends with Gold/Copper ratio as of 7 May 2024 (Source: TradingView, click to enlarge chart)

In the medium-term (multi-week) horizon, recent price actions of the AUD/NZD cross pair via the late April’s bullish breakout above its former medium-term descending resistance from 20 December 2023 swing high has reinforced a medium-term uptrend phase in play since its 22 February 2024 low of 1.0570 (see Fig 2).

The daily MACD trend indicator has inched higher above its signal line which supports the ongoing medium-term uptrend phase of the AUD/NZD.

Intermarket analysis also reinforces a further potential outperformance of AUD against NZD via the narrowing of the 2-year and 10-year yield spread discount of Australia-New Zealand sovereign bonds in the past two months (see Fig 1).

Watch the 1.0940 key medium-term pivotal support on the AUD/NZD to maintain the bullish tone for the next medium-term resistance to come in at 1.1090 and 1.1165 (also the upper boundary of the ascending channel from the 22 February 2024 low).

On the other hand, a break below 1.0940 negates the bullish tone to expose the next intermediate support at 1.0870 (also the 50-day moving average).

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