Synopsis:

ANZ recommends going long AUD/NZD in early 2025, anticipating AUD outperformance driven by diverging monetary policies, growth dynamics, and New Zealand's diminishing carry advantage.

Key Points:

• Year-End Weakness in AUD/NZD:

  • Seasonal factors and risk sentiment tend to drive AUD/NZD lower into year-end.
  • Strong NZD demand from seasonal exporter flows in November and December typically supports the NZD.

• Medium-Term Trade Opportunity:

  • Current levels around 1.08 present an opportunity to establish long positions in AUD/NZD.
  • Target range: 1.10 and above in 2025.

• Monetary Policy Divergence:

  • ANZ expects the RBNZ to cut rates earlier and more aggressively than the RBA:
    • RBNZ: 50bp cut expected in February 2025, with a total rate of 3.4% by end-2025.
    • RBA: Rate cuts to begin in May 2025, with a total of only 50bp, leaving the policy rate at 3.8% by end-2025.

• Relative Economic Growth:

  • Australia’s GDP outlook appears more optimistic than New Zealand's:
    • RBA forecasts moderate growth, while RBNZ anticipates a Q3 contraction of -0.2% q/q before mild recovery.
  • Australia's smaller current account deficit also supports the AUD.

Conclusion:

While seasonal factors and risk sentiment may temporarily weaken AUD/NZD into year-end, ANZ sees this as an opportunity to build long positions around 1.08, targeting 1.10 and above in 2025. Diverging monetary policy and stronger Australian growth dynamics provide a robust foundation for AUD outperformance.