This week, the RBA surprised markets with another unexpected 25 bps hike. With headline inflation at 7% y/y and core inflation firm at 6.5% y/y, the RBA has acted to try and bring down inflation fast. Current market pricing sees the RBA reaching a terminal rate of 4.49% at the end of this year.

The monetary policy of Australia is in contrast to that of New Zealand. The RBNZ signaled that it thinks it has conducted its last interest rate hike by keeping its terminal projections in line with current levels.

So, with this interest rate path divergence opening up between the AUDNZD pair, watch for dip buyers in the AUDNZD pair over the next few days. A more aggressive RBA should lift the AUD against a “mission accomplished on rates” RBNZ.

Major Trade Risks: The biggest risk here is if interest rate expectations change between the RBA and the RBNZ. For example, if inflation in New Zealand rises, then the RBNZ may need to be more aggressive again. This would negate this outlook.

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