Long AUD/NZD – The Great Monetary Policy Divergence is Overdone

Reasons for AUD/NZD Bottom

• A lot of negative news has been priced into the Australian Dollar as highlighted by CFTC speculative positioning data, which shows net AUD shorts at a record.On the flipside, NZD net longs are at an extreme and thus when analysising CFTC positioning data, it is important to take note when at extremes. (Figure 1)
• A rampant increase in vaccinations will be reflected in an improvement of economic data in Q4 for Australia.
• AUD/NZD is the most consensus short across the G10 and looking somewhat overdone.
• NZ rates have priced in 140bps worth of tightening by October 2022, leaving very little room for error (Figure 2).
• Back in 2013-14, AUD/NZD put in a bottom when the RBNZ hiked. Now while history doesn’t repeat itself, it often rhymes (Figure 3)
• Bar any extreme risk aversion, parity in AUD/NZD is rare (Figure 4)

Figure 1. Peak Bearishness for Aussie….. Net Shorts at a Record

Source: Refinitiv

Figure 2. NZ Rates Price in Aggressive RBNZ Rate Path

There is a good chance that the RBNZ raises rates by 50bps at the upcoming, which will likely see AUD/NZD spike lower initially. However, I expect that such a move would put AUD/NZD at a much more attractive level to fade and bottom from there on, as the bar for a hawkish surprise is set high due to NZ rates pricing in an aggressive tightening path.

Source: Refinitiv

Figure 3. AUD/NZD Bottomed in 2014 After RBNZ Rate Lift-Off

Back in 2013/14, AUD/NZD drifted lower as the RBNZ discussed the possibility of raising interest rates before finding a bottom the moment the RBNZ hiked. My view is that we will see similar price action after the RBNZ hikes, with AUD/NZD finding a bottom. This in effect is a sell the rumour, buy the fact.

Figure 4. AUD/NZD Parity is Rare

In the past 20yrs, parity in AUD/NZD has only occurred once, which was during the initial coronavirus shock in March 2020. Good support has generally been found at 1.0250.

AUD/NZD Chart: Monthly Time Frame

Source: Refinitiv