Rabobank's Senior FX Strategist Jane Foley notes that AUD/NZD has pulled back sharply after hitting its highest level since 2013, putting the year-long uptrend at risk. Foley highlights shifting expectations for the Reserve Bank of Australia and Reserve Bank of New Zealand (RBNZ), with markets now pricing multiple RBNZ hikes while expecting the RBA to pause. RaboResearch anticipates a correction in AUD/NZD before stabilisation around 1.20 later this year.

Cross retreats as policy paths diverge

"For the past year, AUD/NZD has trended higher. While the currency pair yesterday reached its highest levels since April 2013, it has subsequently fallen back sharply this morning to levels close to the lows of the month. Indeed, trading throughout May has lacked an air of decision with the market buffeted by a change in market expectations for both the RBA and the RBNZ."

"In our view, the uptrend in AUD/NZD is now at risk of stalling. The 50 day sma at 1.2130 has been tested this morning and a close below could further encourage profit-taking. In view of the extent of the year-long rally, there is scope for a relatively aggressive correction in the currency pair in the coming weeks."

"That said, we would expect AUD/NZD to settle in the 1.20 area later this year."

"While changing short-term interest rate differentials point to the risk of profit-taking in long AUD/NZD positions, we remain wary about the ability of the NZD to outperform on a medium-term view. The New Zealand economy was only in the early stages of recovery ahead of the Iran war, and the RBNZ today referred to the presence of “significant spare capacity...for some time”, with unemployment still elevated. RBNZ rate hikes will only add to the growth headwinds."

"We look for AUD/NZD to stabilise at lower levels later in the year and for a potential return of the AUD/NZD uptrend further out."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)