AUD, NZD: Targets For A M-Term Pullback
AUD: at Risk if Global Growth Outlook Turns.
The Aussie dollar has the highest correlation of any major currency to global growth expectations, given its reliance on commodities and Chinese demand. ..Expectations for global growth may have moved up too much, given that China is now if anything, moving to tighten monetary policy a little while the US is pushing back against free trade deals which were a positive for global growth in the 2000s. And importantly for Australia, the strength in iron ore prices should wane as we head into the second half of the year. As such we think that recent AUD gains are overdone. Renewed USD strength, based on expectations for a fiscal boost and tighter monetary policy, allied to a reversal in iron ore prices should encourage a retreat in AUDUSD to 0.73 by mid-year.
NZD: Outlook to Sour.
The RBNZ is mindful that the currency is overvalued, but also mindful of a hot housing market that is being fueled in part by inflows from China. However, measures could be implemented to directly discourage these inflows, rather than policymakers using the blunter tool of interest rate increases. Because of that, and the fact that there’s a change coming at the head of the RBNZ with Wheeler stepping down in September, markets are pricing in too high a probability of hikes in the next twelve months. With interest rate spreads likely to move against the NZD as a result, we see a pull-back in NZDUSD to 0.69 by mid-year.