Following mixed Australian labour force data yesterday, by the close of business, the chance of a follow-up interest rate cut in July had increased to 16bp or just over 60%. Another full rate cut is priced thereafter, which would see the official cash rate at 0.75%. A rate that would allow the RBA a better chance to meet its labour market and underlying inflation forecasts.
With the path of the Australian economy and the cash rate well defined over the next six months the release of Q1 2019, GDP data in New Zealand next Thursday offers an opportunity to see how the New Zealand economy is fairing in comparison.
The New Zealand economy has been slowing for some time now. At the most recent GDP update, growth slowed to 2.3% year on year, the weakest growth rate since Q4 2013. Next Thursday’s data is expected to see growth moderate again, to 2.2% year on year. Domestic business confidence remains low, which is weighing on investment and hiring intentions. The escalation in trade tensions in early May is providing an additional headwind.
At its last meeting in May, the RBNZ cut the cash rate by 25bp to 1.50%. A “one and done” tone prevailed in the accompanying statement; however, the market disagrees, and another cut is fully priced by September to 1.25%. After that pricing of further interest rate cuts appears underdone, and the risks are the RBNZ is forced to follow the RBA’s lead and cut to 0.75%.
Based on the idea that the RBNZ may need to play catch up, not to mention the ongoing rally in the price of Australia’s largest export, iron ore, there appears value in considering long AUDNZD trades.
Technically, the pullback from the 1.0730 double top appears corrective and overnight AUDNZD again held the key 50% Fibonacci support at 1.0500. Not far below, resides strong medium-term support, firstly at 1.0450 (the 61.8% Fibonacci) and then at 1.0420 (abc wave equality target).
In short, I like buying dips in AUDNZD towards 1.0530/20, leaving room to add at 1.0450/20. The target is a retest and eventual break of the recent highs near 1.0730 with a stop loss placed below 1.0370.
Source Tradingview. The figures stated are as of the 14th of June 2019. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation
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