AUDNZD - hold for 1.1000 then look for mean reversion

6 apr 2022

I now look at Aussie swaps pricing and see a 44% chance of a hike in May and a 20% of 50bp by June. I don’t think this is wholly exuberant although looking further out the rates curve and 8 hikes for this year seems rich and 13 by end-2023 is going to cause genuine problems if it comes to fruition – one has to question who is trading these instruments that far out.

One aspect that stands out when I look at this rates matrix is that there is a 50bp hike is fully priced into Canadian swaps for the next meeting, and there’s a 58% chance of 50bp hike from the RBNZ. I think the Bank of Canada go 50bp, but its fully discounted.

Tactically, AUDNZD could be a good short-term long here for those who think the RBNZ ‘only’ go 25bp next week – the cross is already a momentum play and an upside break of 1.0920 should see 1.1000 come into play – that’s the 138% fibo of the March run up

If I look at relative financial conditions or terms of trade, and even how far price is above its 50-day MA it suggests the risks are for a squeeze into 1.1000 but that is where it may have pulled too far from reality and could be highly susceptible to mean reversion.

Happy to stay long for now, but address into 1.1100 – close longs when prices print a daily close below the 5-day EMA.

CW

So, what takes us to a hike? Next key dates in Oz

14/4 – Aussie employment
27/4 – Q1 CPI – the market already sees this coming in at 4.2% (from 3.5%), which if proven correct should see a May hike lifts above 50% despite the election
3/5 – RBA meeting – 44% chance of a hike – this is live
May – Federal election
18/5 – Q1 wages
7 June – RBA meeting – 20% chance of a 50bp hike
27/7 – Q2 CPI – obviously a lot of time to pass, but the market feels this prints 4.4% - the hiking cycle is on

The market now prices 8 hikes this full year and 13 by next year….some will see this as very aggressive.