AUDNZD in focus amid RBA and RBNZ rate decisions

The Reserve Bank of Australia (RBA) will make its rate decision in the early hours of Tuesday, which makes the Aussie the main focal point during the Asian session. The RBA is not expected to make any changes, so the benchmark interest rate in Australia is likely to remain at 1.5 per cent.  But the Aussie could move nonetheless, particularly if the central bank drops its dovish views. Among the Aussie pairs, the AUD/NZD will be the most interesting one to watch this week because we will also have the Reserve Bank of New Zealand (RBNZ) rate decision coming up on Wednesday night (Thursday morning NZ time). If these central banks show a clear disparity in terms of their monetary policy views then the AUD/NZD could move significantly in one or the other direction this week. Although both central banks currently hold accommodative monetary policy stances, we think that on balance the RBNZ is slightly more tilted towards the dovish side. For that reason, the AUD/NZD could be about to stage a breakout above 1.10.

Indeed, Australian macro figures over the past couple of months have been rather good at least relative to its south-eastern neighbour. For example, the latest quarterly GDP from Australia came in at a good 1.0% in early June which was better than expected and double the figure from the previous quarter, although quarterly CPI was in line at 0.5 per cent. What’s more, retail sales have grown by 0.4% for a few months in a row now and have been better than expected on all those occasions. More importantly, Aussie employment rose sharply by 50,900 month-over-month, easily surpassing expectations. These macro pointers suggest the Aussie economy is perhaps gaining momentum and if the run can be sustained then inflation could accelerate in the months ahead. This may make the RBA a little bit more hawkish at this particular meeting. If so, then there is a good chance that the Aussie may rally.

However, the RBA is likely to make mention of ongoing trade spat between its largest trading partner, China, and the US. Judging by the behaviour of the Chinese stock markets, and Trump’s claims, the Chinese economy is hurting by these tariffs. If the US tariffs are indeed weighing on Chinese demand, then this bodes ill for Australian exports to China. But as far as the AUD/NZD is concerned, the Chinese impact can be ignored. This is because China is also the largest trading partner of New Zealand. If weakness in Chinese economy is going to weigh on Aussie exports, it will weigh on NZ exports too.

Ahead of the RBA and RBNZ rate decisions, the AUD/NZD is looking constructive from a technical perspective having made a series of higher lows, both on a higher and shorter term time frames (inset shows weekly chart with higher lows since major low was formed in 2015). What’s more, price is currently above the main moving averages, making the trend objectively bullish. These technical indications therefore point to a potential breakout above resistance and psychologically-important 1.1000 level in due course. Short-term support comes in around the 1.0930 level. The more significant support is around 1.0850 where the most recent short-term low converge with the 50- and 200-day moving averages. Thus, if price were to close below this 1.0850 level then this would be a bearish outcome. But for as long as it remains above 1.0850, the path of least resistance would therefore remain to the upside.