AUD/NZD: Bulls stalling at trendline resistance, AUD overcooked

• AUD/NZD rallies to the highs levels since 2019 on RBNZ/RBA divergence.
• The case for a lower AUD is clear as far as the eye can see.

AUD/NZD is trading in the 1.0760s having climbed up to the highest levels since November 2019 on the divergence between the Reserve Bank of New Zealand and the Reserve Bank fo Australia. 

The case for a lower AUD

We are in a world of deflationary risk and we are seeing the markets adjust to that through the US dollar. The DXY has claimed back the 100 handle as markets prepare for a debt-riddled short squeeze on the dollar which can only spell more danger for commodities down the line. This leaves the Aussie exposed and most likely will help to force the hand of the RBA when Australia's economy warrants it. While the RBNZ's bias towards easing has supported a higher cross, but when markets start to predict that that RBA will follow suit, that will be the crosses downfall.

• AUD/NZD extending the RBNZ RBA playoff-rally

Now that the curve of infection rates has flattened in Australia, the federal government gave the green light for states to begin easing restrictions within their own timeline. However, while Australia's score sheet is one of the best when it comes to the economic impact and cases of COVID-19, the economy is far from out of the woods. One of the nearest domestic triggers for weakness in AUD will be when businesses refuse to reemploy staff that they let go of as employers worry about a second shutdown pertaining to the spread of COVID-19.

The economy is highly dependent on the population spending – yet house prices have been forecast by the big banks to crash. However, the pillars of inflation, money velocity (spending) and mining CAPEX, when pulled from under the economy, with a slight to the greenback and the RBA's inability to respond to the economic crash fast enough, this will be the demise of AUD. The RBNZ, on the other hand, is ahead of the curve, which could give the NZ economy more of a soft landing. 

Meanwhile, yesterday’s "mega Budget flagged a rise in NZGB issuance to $60bn in the year to June 2021, way more than any forecasters had tipped," analysts at ANZ Bank explained:

Many in the market are likely betting that QE will be expanded and there is a strong signal for this in the Finance Minister’s letter of indemnity to the RBNZ, which explicitly indemnifies the Bank for up to 50% of nominal and 30% of linker outstandings. That being the case, the focus for the market should perhaps be that, rather than $60bn (although that is the QE cap for now and expanding it would require MPC approval). That has got to at least take some of the heat out of yesterday’s shock.

AUD/NZD levels