Synopsis:

ANZ sees risk sentiment as the primary driver for both AUD and NZD, with negative sentiment weighing on both currencies despite a weaker USD. The ANZ Risk Appetite Index has hit its lowest level since late 2022, but historically, such deep pessimism has preceded strong recoveries in AUD and NZD. While short-term positioning remains bearish, a sentiment rebound could help both currencies recover against EUR and GBP, with NZD in particular at risk of a short squeeze due to extreme short positioning.

Key Points:

AUD Outlook 🇦🇺

1️⃣ AUD Struggles Despite Weaker USD 📉

• Fails to hold above 0.63, pressured by weak risk appetite.
• ANZ Risk Appetite Index at its lowest since late 2022, surpassing the 2024 carry trade unwind.

2️⃣ Market Positioning Still Bearish 💵

• CFTC data shows an increase in AUD/USD short positions.
• ANZ-observed spot flows confirm net AUD selling despite USD weakness.

3️⃣ February Labor Data in Focus 📊

• A strong jobs report could help AUD marginally, reinforcing the RBA’s cautious approach to rate cuts.
• Markets still price in a May cut, but ANZ sees only one cut in 2025 (August).

4️⃣ Near-Term Neutral on AUD/USD, But Scope for GBP & EUR Gains 🔄

• While AUD/USD may remain stuck, AUD has room to recover against GBP and EUR.

NZD Outlook 🇳🇿

1️⃣ NZD Lags on Crosses Amid Weak Sentiment 📉

• Like AUD, risk sentiment remains the key headwind.
• Net short NZD/USD positions hit a record high and have persisted at these extreme levels all year.

2️⃣ Q4 GDP in Focus, But Recovery Still Weak 🏦

• New Zealand’s economic data surprises are the weakest in the G10.
• RBNZ easing hasn’t fully filtered through, keeping GDP growth weak.
• Business surveys suggest a gradual recovery, but this isn’t yet reflected in headline data.

3️⃣ Short Squeeze Risk for NZD/USD 🔄

• Positioning is extreme, making a "short squeeze" rally a real possibility.
• If sentiment improves, NZD/USD could move higher quickly.

Conclusion:

ANZ remains neutral on AUD/USD near term but sees potential for AUD to recover against GBP and EUR. NZD remains heavily shorted, making it vulnerable to a short squeeze rally, particularly if risk sentiment improves. Market focus will be on Australian labor data and New Zealand's Q4 GDP for near-term direction.