Fundamental and Technical Outlook: AUD/NZD

Fundamental Outlook: AUD/NZD

During the Asia-Pacific session, the main event was Australian CPI which saw headline CPI beat expectations at 0.7% q/q versus 0.5% expected and 1.3% y/y versus 1.1% expected. The RBA's core measures of inflation weren't quite as upbeat with Weighted Mean CPI slightly missing expectations at 0.3% q/q versus 0.4% expected and 1.3% y/y versus 1.4% expected. Trimmed Mean CPI printed in line with expectations at 0.4% q/q and 1.7% y/y. Following the report, expectations for the RBA to ease at their November meeting have fallen from 16% to just 7% with AUD rallying across the board. There is no tier 1 data due to be released in today's London session.

In today’s session, we expect the strongest currency to be AUD which should remain supported by overall positive CPI data and reduced rate cut expectations for their November meeting. The weakest currency is expected to be NZD with the RBNZ still expected to ease at their November meeting.

Source: Jarratt Davis

Technical Outlook: AUD/NZD

Overview of Currencies

USD: The Federal Reserve are most likely to leave their current policy unchanged at their next meeting due to its proximity to the US elections and the fact that the Fed's November meeting has no scheduled press conference which would be necessary for the Fed to provide further in-depth information following such a decision. Given 14 of 17 Fed members expect at least a hike in 2016, there is a strong possibility of the Fed increasing rates by 25 basis points at their December meeting. This gives the USD currency an overall bullish tone for the next three months.

EUR: The ECB are most likely to leave their policy unchanged at their next meeting because they have already cut their main rates heavily over recent years and they are at what many experts consider to be an ultimate low. If the bank did conduct a policy change within the next three months, then the most likely move is an increase in its QE programme because it is still battling low inflation alongside low interest rates, so more powerful action could be needed. This gives the EUR currency an overall bearish bias over the next three months.

GBP: The BoE are most likely to ease policy within the next three months with the BoE's November meeting seen as the most likely meeting for further cuts providing "their August forecasts are met". The UK economy, however, has been much more resilient following the 'Brexit' than many had expected, and therefore should UK data continue to surprise, expectations for further BoE easing may be pushed further back and shift expectations towards the BoE remaining on hold. Overall however given the BoE's latest comments and expectations for further cuts potentially as soon as November, we maintain our bearish fundamental bias on GBP.

AUD: There is a strong possibility that the RBA will ease policy again during 2016 as many economists believe the door for further easing remains open due to continued low inflation in Australia. As such inflation data for Q3 will be key in regards to future policy expectations, Q3 CPI is not released until October and therefore although the RBA will likely leave policy unchanged at their September meeting, further easing in later meetings remains a strong possibility especially if Q3 CPI disappoints. This, therefore, maintains our bearish bias for AUD.

NZD: There is a strong possibility that the RBNZ could ease policy further at their November meeting due to continued concerns over inflation. Despite Q3 inflation beating expectations at 0.2%  q/q and y/y, the RBNZ are still expected to ease at their November meeting with OIS pricing suggesting an 84% chance of a 25 basis point cut. With continued expectations for further RBNZ easing, we maintain a bearish bias on NZD.

CAD: The BoC are most likely to leave monetary policy unchanged at their next meeting as Canadian inflation is within the BoC’s target range of 1-3% with the economy also supported by accommodative fiscal measures. If the BoC did conduct a policy change within the next three months, it would likely be a rate cut based on concerns over Canada’s competitiveness since CAD’s appreciation throughout the year and increasing concerns over inflation. Although this gives CAD a slightly bearish fundamental bias, with most central banks currently in easing cycles CAD has a comparatively neutral bias.

JPY: The BoJ will most likely need to ease policy further as the increases made to its ETF purchases and USD lending programmes will probably be insufficient in helping inflation reach its target of 2%. Kuroda’s latest comments that " there is currently no need to reduce rates" would, however, suggest that the BoJ are likely on hold for the foreseeable. Therefore we continue to hold our overall bearish fundamental bias, however, acknowledge that further declines in inflation may be necessary before further easing can be expected.

CHF: The SNB are most likely to leave their policy unchanged at their next meeting, as interest rates in Switzerland already remain at a record low of -0.75%. If the SNB were to change policy in the next three months, it would likely be a rate cut as inflation continues to remain far below the SNB’s target. This gives CHF an overall bearish tone.

Source: Jarratt Davis