The AUD and NZD have lost significant ground in recent days as global macro conditions have deteriorated further. As discussed in detail in the FX Quarterly, we expect a deterioration of the European crisis to extend the short-term underperformance of cyclical assets globally, as well as strengthen the USD because of its safe-haven status. As such, we now expect additional underperformance in both the AUD and NZD near-term. We also expect the RBNZ to delay its rate hiking cycle until 2012.
We are lowering our AUD/USD forecasts to 0.96 in 1m and 0.93 in 3m, and our NZD/USD forecasts to 0.77 in 1m and 0.75 in 3m. This is consistent with our view that EUR/USD will weaken over the next three months. As we have noted previously, both the AUD and NZD have recently shown a strong correlation with changes in EUR/USD (see Figure 1).
We now think it is highly likely the RBNZ will follow the path of least regret and postpone the reversal of the 50bp rate cut administered after the Christchurch earthquake until Q1 12. However, we still ascribe a 25% probability of a 25bp hike in December and believe a rate cut is a very unlikely event.
The further deterioration in global macro conditions creates significant downside risks to Australian and New Zealand activity through lower commodity prices and global growth – something that both the RBA and RBNZ have noted in recent communications. In addition, continued disruption to funding markets is likely to push bank borrowing costs higher. We expect consumer and business confidence to decline in response. We see these factors delaying RBA and RBNZ policy tightening near term. For now, both central banks will probably adopt a wait-and-see approach to gauge the impact of the recent global developments on economic activity and inflation.
Looking into 2012, we expect the global environment to stabilise and the RBA and RBNZ to return their focus to domestic activity and inflation. The associated tightening in monetary policy over 2012 will support the AUD and NZD, in our view. Our 12m AUD/USD and NZD/USD forecasts are respectively 1.06 and 0.87.
BARCLAYS CAPITAL
FOREIGN EXCHANGE RESEARCH | INSTANT INSIGHTS