AUD/NZD – Retains constructive bias

AUD/NZD has rallied to recent highs of 1.1174, responding to a bullish W bottom pattern. Terms of trade divergence favours AUD over NZD.
Chief Investment Office30 Jun 2022
Photo credit: AFP Photo

Chart 1

Source: Bloomberg

AUD/NZD has seen a year-to-date range corridor of 5.5% (in blue). A quick look at its weekly chart shows that the bias is clear – the cross enjoys a bullish, positive moving average convergence/divergence (MACD) signal, and other than an early January to test and hold the 40-week moving average (then around 1.0570), there has been a “steady as she goes” grind higher. This grind higher has now tested both the August 2020 peak of 1.1044 and the August 2018 peak of 1.1176. We can assume that the path of least resistance still leans to the topside unless there is a decline that threatens 1.0806, the pivotal moving average level.

Chart 2

Source: Bloomberg

Both the Reserve Bank of Australia (RBA) and the Reserve Bank of New Zealand (RBNZ) are now into full flight of policy normalisation. The RBNZ began its current hike cycle at its October 2021 policy meeting from a then official cash rate (OCR) floor of 0.25% to its current 2.0%. RBNZ’s projections skew towards a terminal 3.9%, but the market prices the possibility of OCR headed for a 4.5% high. A relatively hawkish RBNZ vis-à-vis the RBA saw the 10 years Australian-NZ yield spreads (dotted in red) trekking lower.

However, AUD/NZD (in blue) is responsive to macro headwinds. NZ terms of trade (in green) has been in a plunge mode since March whilst the Australian terms of trade (in black) has steadied itself after a protracted decline in the first two weeks of March. In gist, the macro winds are blowing in favour of the AUD over the NZD, as Australia has the set of commodities that has glowed following the Russia-Ukraine crisis and a superior current account profile.

Chart 3

Source: Bloomberg

On the long-term navigation map, AUD/NZD completed a 27% rout from March 2011’s 1.3796 peak into 1.0021 lows. The termination of bearish pressure then saw 258 weeks of sideway congestion, that saw another flawed parity test ending at a 0.9996 low. The congestion either endured a complex correction with the WXY ratchet or a simple ending diagonal pattern. In either case, the cross’ bearish pressure has ebbed away, and an advance is being seen either via 3 price legs higher or the larger form of 5 legs higher 1-2-3-4-5 (within the coloured oval). Therefore, upside risks should dominate, as the path of least resistance.

Chart 4

Source: Bloomberg

The strong rebound from 0.9996 lows has removed parity test as a proposition, and the cross still enjoys a lingering albeit multi-year bullish inverse head & shoulders bottom. On the intermediate run, the cross has pulled higher on a clear W bottom pattern.

The cross has hit a 1.1174 high, which has fulfilled the 78.6% Fibonacci retracement of 1.1430-0.9996 at 1.1123. Hence, a pullback is going through the motions.

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