While the Australian dollar has underperformed compared to its New Zealand counterpart in recent days, it’s not likely to remain the case.
If Ray Attrill, global co-head of FX strategy at the NAB is right, the AUD/NZD is likely to go much higher.
In a note out today Attrill outlines a few reasons why the currency pair is likely to move higher in the period ahead.
Firstly, while the New Zealand dollar rose today following remarks from RBNZ Graeme Wheeler that hosed down the expectations for further large-scale rate cuts from the bank, Attrill points out that “Wheeler made clear that further exchange rate depreciation is both required and expected”.
That sentiment, along with another likely decline in the next Global Dairy Trade auction scheduled for August 4, an event that usually has a large impact on the New Zealand dollar given the importance of dairy exports to the New Zealand economy, is seen as a “negative risk event” in Attrill’s opinion.
Secondly, on the Australian dollar, Attrill notes that while the euro and New Zealand dollar have both squeezed higher in recent days having been under significant selling pressure earlier in the month, the Australian dollar, in a similar situation, has not.
Indeed, with iron ore and coal prices broadly steady in July while the Australian dollar has fallen by 4.5% on a trade-weighted basis, Attrill believes the RBA will soften its language towards the level of the currency when its August monetary policy statement is released on August 4.
Should that occur it “could be the catalyst for a more significant short covering rally in AUD than witnessed so far this week”.
Attrill is looking for the AUD/NZD to move as high as 1.14. Today the pair currently buys 1.0910.