The AUD/NZD may finally hit a wall. After months of strong upward momentum, today’s combination… Tight RBNZ shock and weak Australian inflation data Provided the strongest challenge yet to the pair’s medium-term uptrend. It is clear that the risks of a correction are increasing – however Markets are still not completely convinced that the reversal has already begun.
This missing emphasis is important. If AUD/NZD cannot fall over the next few days through the support at 1.2132, traders may need to wait longer for the correction move to fully develop.. In this scenario, markets would likely need additional weak Australian data – lower employment numbers, slower core inflation, or broader evidence that the economic recession is opening up more quickly – before aggressively repricing expectations for the RBA.
The biggest surprise came from New Zealand. The Reserve Bank of New Zealand may have kept interest rates unchanged at 2.25%, but the details below were severely hawkish. The committee split 3-3 between confirmation and immediate removal, forcing Gov. Anna Breyman to use her casting vote to leave the policy unchanged. More importantly, the Reserve Bank of New Zealand has explicitly indicated that interest rates are likely to be hiked soon. “Increases in OCR are likely in future meetings,” Bryman said, warning that “even if the conflict in the Gulf stops now, we could still see the effects of inflation going forward.” In practice, the July meeting is now all set for a rate hike.
Australia provided the other side of the divergence trade. Headline CPI slowed more than expected from 4.6% y/y to 4.2% y/y, relieving some immediate pressure on the RBA. Although the core inflation rate remains stable at 3.4%, the recent deterioration in labor market data has increasingly strengthened the case for patience. Markets now see June as effectively locked for comment, while the RBA may also prefer to wait until August before deciding whether another “lockdown increase” is truly necessary.
Technicallythe charts are also in line with the total divergence story. AUD/NZD rose to 1.2283 this week but struggled to maintain its gains with the 100% key forecast at 1.0759 to 1.1634 from 1.1412 at 1.2287. At the same time, the bearish divergence on the D MACD continues to warn of fading bullish momentum.
However, the market has not yet achieved the decisive collapse that the bears have been waiting for. A strong break below the 1.2132 area will confirm the medium-term top and expose the 1.1922/50 support area next. Until that happens, traders may still need more evidence that the Australian economy is weakening quickly enough to warrant a larger AUD/NZD correction.
