AUD/NZD Risk Neutral Short Scalp- A Play on Rate Expectations

Today’s rally in risk offers ideal entry targets for further downside moves in the AUD/NZD pair. Although weaker than expected employment data overnight saw little in the way of substantial aussie weakness, we note that a significant pickup in risk appetite limited further downside losses for the aussie. Reports showed that the labor market had slightly contracted in July with the unemployment rate rising to 5.1% from 4.9%. A glance at the Credit Suisse overnight swaps indicates that markets are now pricing in more than 145 basis points in interest rate cuts from the RBA over the next 12 months with participants having already priced in a 25basis point cut at the next central bank policy meeting. Although both the kiwi and the aussie tend strengthen on improving market sentiment, the aussie is likely lag significantly as interest rate expectations now strongly favor the kiwi with markets now expecting more than 47 basis points in hikes from the RBNZ.

The daily chart shows the pair continuing to hold within a descending channel dating back to the May highs just below the 1.37-figure. A cross of the 100day moving average below the 200day SMA also supports further weakness for the pair and accordingly our bias will be weighted to the downside.