Bank of America Forecasts AUD Strength Over NZD Amid Rate Cut Mismatch

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Bank of America economists predict the Reserve Bank of New Zealand (RBNZ) will cut rates by 125 basis points for the rest of the year, significantly more than the 68 basis points priced in by the market. In contrast, they expect the Reserve Bank of Australia (RBA) to reduce rates by 50 basis points, less than the 63 basis points anticipated by markets. This difference in expectations could lead to potential gains for the Australian dollar (AUD) against the New Zealand dollar (NZD) moving forward.

In the short term, the 14-day Relative Strength Index (RSI) indicates that the AUD/NZD pair is oversold. However, Bank of America remains cautious, pointing to previous cases, such as in October and November 2022, when similar oversold signals didn’t result in sustained reversals. During that period, the AUD/NZD pair dropped from an initial oversold signal of 1.1075 to a final signal at 1.0515.

Additionally, Bank of America’s Liquid Cross Border Flows (LCBF) indicators show that hedge funds are currently holding short positions in NZD. If these positions are unwound, it could lead to a sharp decline in the AUD/NZD pair. Nonetheless, the bank views the 200-week moving average, around 1.0850, as a more reliable support level to consider for potential upside in the pair.

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