By Chris Tedder, Research Analyst,

AUDNZD has been surging higher since the pair was rejected from breaking below parity in mid-April. The rally has seen AUDNZD climb 900 pips at its highest point in under a month. As we explained in our article titled ‘AUDNZD: this could be only the beginning of a much larger rally’, the pair’s change of fortune was underpinned by a fundamental change in the behavior of yield seekers in the face of a tighter AUD-NZD yield spread.

The market has been questioning the effectiveness and need for further policy loosening in Australia, while becoming more dovish on the outlook for NZ interest rates. In Australia, the RBA all-but removed its easing bias after cutting interest rates in May due to some strong labour market and other domestic economic data, after previously stating that the effectiveness of looser monetary policy at this end of the policy spectrum is greatly diminished.

Meanwhile, across the Tasman the RBNZ was preparing to launch further verbal assaults on the kiwi and highlight the idea of looser monetary policy. Here are the key points that changed the game for the NZ dollar:

·         RBNZ McDermott stated that the RBNZ isn’t considering hiking interest rates at this stage and weaker demand and inflation would prompt rate-cut talk. He summed it up by saying the inflation outlook requires a period of supportive policy, suggesting the RBNZ is more concerned about underlying low inflation than we previously thought.

·         The RBNZ back-up McDermott’s dovish comments at its policy meeting at the end of April – “The timing of future adjustments in the OCR will depend on how inflationary pressures evolve in both the non-traded and traded sectors.  It would be appropriate to lower the OCR if demand weakens, and wage and price-setting outcomes settle at levels lower than is consistent with the inflation target.”

·         Soft Q1 labour market data: the unemployment rate unexpectedly remained at 5.8%, after being revised higher in Q4 from 5.7%, and employment only increased by 0.7% over the quarter (expected 0.8%). Furthermore, average hourly earnings only increased 0.2% q/q, completely missing an expected 0.9% q/q increase.

However, some strong retail sales numbers out of NZ this morning have cast some doubt over AUDNZD’s recent rally. Retail sales grew at their fastest pace in Q1 since at least 2003 and all sub-categories gained for the first time since 2006. Headline retail sales, excluding inflation, grew an impressive 2.7% q/q, smashing an expected 1.6% increase, and Q4’s headline number was revised higher to 1.9% from 1.7%.

This latest bout of economic data from NZ has sent AUDNZD back below an important historical resistance zone around 1.0800. However, the pair remains in an overall downward trend and today’s number aren’t going to rule out the possibly of looser monetary policy in NZ, thus our overall bullish bias, both from a technical and fundamental standpoint, still remains intact, albeit only just. In saying that, AUDNZD may head towards the base of its medium-term upward channel in the near-term, and if price breaks out of this channel our technical bullish bias would be negated.