Synopsis:

BofA sees AUD/NZD moving higher as diverging monetary policy paths between the RBA and RBNZ widen rate differentials in favor of AUD.

Key Points:

1. Economic Divergence Between Australia and New Zealand

   • Despite recent stability in AUD/NZD, economic fundamentals suggest a higher AUD ahead.
   • Australia’s economy is proving more resilient, while New Zealand faces fiscal consolidation and weaker asset prices.

2. Monetary Policy Driving Rate Differentials

   • The RBA is expected to cut rates earlier (February 2025) but faces higher inflation risks that could slow easing.
   • In contrast, the RBNZ is likely to cut rates aggressively, further widening rate differentials in favor of AUD.

3. Revised Forecasts Reflect AUD/NZD Upside

   • BofA now expects AUD/NZD to rise to 1.13 (from 1.10) by Q4 2025.
   • NZD/USD year-end forecast raised to 0.62 (from 0.60), with a Q4 2026 target of 0.63 (from 0.61).

Conclusion:

With monetary policy divergence strengthening in favor of AUD, BofA expects AUD/NZD to break higher in 2025. Higher rate differentials and weaker NZ economic prospects support this bullish outlook.