Following ANZ’s decision to lower its forecast for the RBA cash rate two weeks ago, the bank’s currency strategy team have made an equally large cut to its forecast for the AUD/NZD exchange rate, expecting the pair to trade at 1.0850 in 12 month’s time compared to their previous estimate of 1.2000.
Here’s Daniel Been, currency strategist at the ANZ, on the reason for the sharp downward revision:
“A significant part of our previous bullishness was contingent on a more stark divergence in the tone from the two central banks. While we expected the RBA to remain on hold and cautiously optimistic, we were still expecting easing to be forthcoming from the RBNZ, or at the very least for its rhetoric to be decidedly more dovish.
With ANZ now expecting the RBA to ease rates, this divergence is no longer obvious and as such, further strength looks unjustified.”
Been expects both economies to grow somewhere slightly below trend, with both the RBA and RBNZ to ease monetary policy further over their 12-month forecast horizon.
“This sort of mediocre performance from both economies means that the cross should remain somewhere close to the middle of the long term range. However, the slightly better momentum in New Zealand’s terms of trade justifies trading on the lower side of trend, where our 1.0850 forecast sits,” says Been.
At 1.30pm on Tuesday the AUD/NZD traded at 1.0906.