A positive environment for carry currencies and better-than-expected Q1 activity data supported the AUD in the first part of this year, although slowing domestic economic momentum has capped AUD upside recently. The Reserve Bank of Australia (RBA) is unlikely to support the AUD in the near term, in our view, and we continue to expect AUD depreciation as recent declines in spot commodity prices pass through to export prices (Figure 12). Further ahead, rising US yields are likely to undermine support for carry currencies, including the AUD, but a pickup in Chinese economic activity and 100bp of RBA rate hikes next year, beginning with a 25bp hike in Q1, would provide some offset. As such, we now forecast a more modest pace of AUDUSD depreciation to 0.87 in 12m, from 0.85 previously.
The AUD is likely to outperform the NZD as New Zealand growth momentum begins to slow and the RBNZ considers a pause in its tightening cycle, disappointing market expectations for more than 50bp of rate hikes by year-end. At its June MPS, the RBNZ estimated New Zealand GDP growth was running close to 4.0% y/y and it expects annual GDP growth to slow to 2.2% in 2015 and 2.4% in 2016. In contrast, our economist expects Australian economic growth to advance to 3.1% this year and 3.5% in 2015, from 2.4% in 2013. RBNZ loan-to-value ratio restrictions for residential mortgages introduced on 1 October 2013 to curb New Zealand house price inflation appear to be working, reducing the need for tighter monetary policy (Figure 13). In addition, we think the RBNZ remains very concerned about the strong NZD, particularly in the context of recent commodity price declines. As such, we now expect AUDNZD to appreciate to 1.11 in 3m, 1.13 in 6m and 1.14 in 12m.
Barclays