Investors anticipate that the Australian dollar against the New Zealand dollar will test its yearly highs due to divergent views on interest rate prospects among policymakers.
The currency pair closed at 1.1049 last week, with Westpac Banking Corp. forecasting that it will reach 1.1150 by the end of December, close to this year's high of 1.1152. National Australia Bank Ltd. suggests that the exchange rate could climb to 1.15 next year.
As the Reserve Bank of Australia (RBA) defies the global trend towards easing monetary policy to curb inflation, interest rate differentials are becoming a key driver of the Australian dollar's performance against the New Zealand dollar. In contrast, it is expected that the Reserve Bank of New Zealand (RBNZ) will deliver another substantial rate cut at its next meeting following a recent 0.5 percentage point reduction.
Richard Franulovich, Head of FX Strategy at Westpac, stated, "In the macro market, the cross is a popular long trade as it capitalizes on significant policy dislocations within the G10."
"Within the G10, the RBA and the Bank of Japan are the only two central banks that have not cut rates, while the RBNZ's forward guidance has the market anticipating a greater magnitude of rate cuts over the coming year than anywhere else."
This month, the Australian dollar against the New Zealand dollar has been hovering in the 1.10 - 1.11 range, with the upward momentum stalling, as traders are seeking the next clue to push the currency pair higher.
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Australian inflation data, scheduled for release on Wednesday, could help determine the currency pair's near-term trajectory. Deputy Governor of the RBA, Andrew Hauser, stated this month that the RBA's strategy is to gradually reduce CPI to protect the labor market, adding that Australia's inflation remains "too high." Consequently, he said, the RBA's rates will not decrease as much or as early as other central banks.
Franulovich from Westpac noted that New Zealand's employment data, due in early November, will also be crucial, as the report may reinforce expectations for further substantial rate cuts. The RBNZ has been lowering the official cash rate since August, and the market is pricing in a 75 basis point cut risk for November.
Ray Attrill, Head of FX Strategy at National Australia Bank in Sydney, said, "The expectation is for an aggressive easing cycle from the RBNZ, while the RBA's easing cycle is significantly delayed and shallower, which means the Australian dollar against the New Zealand dollar will reach 1.12 for a period next year."
"It's not hard to justify a significantly higher exchange rate level, such as close to 1.15."
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