AUD/NZD: Divergence between Autralia and New Zealand to favor the downside – MUFG

The Australian dollar is facing increasing bearish risk as zero-covid policy could weigh on growth, reinforcing the divergence with the New Zealand dollar, explained analysts at MUFG Bank. They have a trade idea of shorting AUD/NZD with a target at 1.0250 and stop loss at 1.0750 

Key Quotes:

“We have had some data releases this week that we believe will increasingly see investors question the zero-covid policy stance given the potential impact to growth if infections continue to escalate. Retail Sales in June plunged 1.8%, much weaker than expected while today the Composite PMI for July fell to 45.2, the lowest since May 2020. These developments will only reinforce the divergence with New Zealand where monetary policy will be tightened far sooner.”

“We acknowledge there is a clear risk that RBNZ rate hike expectations could well be pared back but the surge in New Zealand inflation last week (1.3% Q/Q versus 0.7% expected) we believe will leave the RBNZ more determined to remove policy stimulus assuming there is no fresh outbreaks of COVID in New Zealand.”

“NZD should be less sensitive to global developments while Australia domestic developments will add to AUD woes. New Zealand today announced the suspension of all quarantine-free travel from Australia for 8 weeks which should limit risks in New Zealand where there are currently 80 active COVID cases, with an increase of 20 in the last 24hrs and all confirmed at the border”.