Outlook for antipodean cross, AUD/NZD, and rates - Westpac

Analysts at Westpac offered an outlook for the antipodean cross, AUD/NZD, and rates.

Key Quotes:

"Corrections appear to be continuing and could run as far as 1.0450 during the days ahead. Thereafter the multi-week rally should resume.

AUD/NZD 1-3 month: Higher to the 1.0650-1.0770 area, mainly for valuation reasons. The cross remains well below fair value estimates implied by interest rates, commodity prices and risk sentiment. However we acknowledge the AUD’s higher sensitivity to China news, as well as Australia’s AAA downgrade risk, any such action likely to delay any return towards fair value during the next few months (11 Jan).

AU swap yields 1 day: The 3yr and 10yr should open around 2.10% and 2.90%, respectively.

AU swap yields 1-3 month: The 3yr has probably based at 1.60%, the RBA expected to sit tight at a 1.5% cash rate for some time. (7 Nov).

NZ swap yields 1 day: NZ 2yr swap rates should open at 2.40%, the 10yr at 3.40%.

NZ swap yields 1-3 month: The RBNZ ended its easing cycle on 10 Nov and will remain on hold for a long time. That will anchor the short end somewhat (although the 2yr-OCR spread – one measure of stretchedness – could rise further given historical precedents) with the long end free to follow offshore yields. The curve steepening trend should continue."