Buy AUD/NZD: Commodity price differential driven trade - Westpac

Analysts at Westpac offered a trade motivation to buy AUD/USD.

Key Quotes

“Entry: Buy 100% at 1.0855, Stop: 1.0780, Target: 1.1050”

“Rationale:

• This cross has been undervalued relative to interest rates and commodities for some time. However, sustained strength in iron ore combined with fresh weakness in dairy has attracted AUD/NZD bulls back into the game
• Dairy prices are poised to correct further, thanks to a recovery in supply globally. NZ supply has been boosted by good growing conditions in the second half of the season, to the extent that Fonterra has repeatedly revised its GDT offer quantities higher. In contrast, iron ore prices should benefit near term on Chinese demand as high steel margins keep production at steel mills up
• Monetary policy: both central banks are on hold for the foreseeable future. The RBNZ has been more emphatic about remaining so for the next two years. In contrast, the RBA’s tone has sounded more upbeat following a string of decent data outturns
• Cognisant the cross has already had a good run over the past month and will need to correct soon, we prefer not to chase the move but rather buy on dips”