AUD/USD weekly outlook: AUD/NZD Implied vols rise into RBA, RBNZ

• Delayed tariffs from the Trump administration helped AUD gain some decent ground against the US dollar and Japanese yen
• A not-so-dovish RBA cut could continue to support AUD/USD this week
• Implied volatility for AUD/NZD is rising ahead of this week’s RBA and RBNAZ meetings
• RNBZ expected to cut by 50bp to 3.75%, RBA expected to cut by 25bp to 4.1%

It’s highly likely that the RBA will cut their cash rate by 25bp to 4.1% tomorrow, given headline CPI, trimmed-mean inflation and GDP for Q4 all fell below the RBA’s forecasts. However, as money markets have mostly priced in a cut for the past three weeks, the RBA will also need to signal further cuts (or not cut at all) for there to be any surprise at all.

It would stun markets if they don’t cut and probably send AUD/USD sharply higher alongside the ASX 200. But I feel the pressure for them to cut is too great for them not to.

Where to look for the RBA’s futures monetary policy moves:

- The usual monetary policy statement will be released alongside the rate decision. Should they retain their reference that “underlying inflation remains too high”, it could push back expectations of further cuts. Given trimmed mean inflation remains above the RBA’s 2-3% target band, I suspect that reference is here to stay

- The RBA will also release their revised economic outlook in their quarterly SOMP (statement of Monetary Policy), and we can see if they have downwardly revised their cash rate and inflation outlook to determine whether market pricing of three or four cuts this year to be accurate

- RBA governor Bullock will hold a press conference at 15:30 AEDT, where she can fine tune the message and drop further clues over the timing or magnitude of future cuts

An RBA cut, but no dovish cigar

My base case is for a 25bp cut to 4.1%, inflation and GDP to be revised slightly lower, but the RBA will stop short of signalling further cuts. Instead, I suspect future decisions will be made on a ‘meeting-by-meeting basis’. Even so, I’d be wary of expecting another cut in April or May.

Employment remains robust and firmer than the RBA’s own forecasts, and uncertainties remain around tariffs, their impact on the Australian economy. It also seems likely that the next Federal election will be held in May. While this may not necessarily derail another cut, I cannot see it arriving at their next meeting in April, or in the month of the election. This makes June a potentially live meeting, but why would they signal that now?

RBNZ likely to cut by 50bp no Wednesday

This is the base case of most economists, which should send the cash rate down to 3.75% - its lowest level since October 2022. And it would mark their third consecutive 50bp cut, or fourth cut of the cycle. This of course will put New Zealand’s interest rate below Australia’s by 35bp, even after the RBA’s anticipated RBA cut. And this is why AUD/NZD has been creeping higher in recent weeks.

Should I be correct in thinking that the RBNZ will deliver a dovish 50bp cut while the RBA delivers a cautious 25bp cut, it should at least continue to support AUD/NZD, if not send it higher on the day.

The 1-week implied volatility level for AUD/NZD has been rising while the equivalent for AUD/USD is lower. And that suggests a lack of concern over the RBA meeting in isolation, compared to the combination of the RBA and RBNZ over a 24-hour period.

AUD/USD futures positioning - COT report:

Futures traders continued to shy away from short bets against AUD/USD last week, in light of delayed tariffs and a risk-on environment for commodity FX

• Asset managers reduced net-short exposure by -16.5k contracts, their fastest pace in 20 weeks
• Large speculators reduced net-short exposure by -9.7k contracts, their fastest pace in 18 weeks
• While both sets of traders remain heavily net short, I see the potential for this to be further reduced in the coming weeks given my bias of a deeper pullback on the US dollar and further gains for commodity FX

AUD/USD technical analysis

The Australian dollar reached my bullish target around the August low, which I had in place since the false break of the January low. AUD/USD has now risen 4.6% since the February low, and given the reduction of shorts and initiation of new longs, I suspect further gains could be on the horizon.

Wei6th that said, resistance was found just beneath the value-area low (VAL), and we should factor in a bout of volatility for tomorrow’s RBA meeting. But unless the RBA surprise with a dovish cut, any pullback may be limited and AUD/USD could favour bulls seeking dips.

The weekly pivot point and HVN around 0.6320 is an area of interest for bulls to consider, should we be treated to a retracement.

AUD/NZD technical analysis

Monetary policy expectations of the RBA and RBNZ sent AUD/NZD to a YTD high of 1.1140 last week, although we saw a momentum shift just beneath the July high on Friday. Should the RBNZ surprise with a less-dovish 50bp (or even a 25bp cut) then AUD/NZD could have further to fall.

As the RBA meet tomorrow, I suspect we could be looking at a higher AUD/NZD by Tuesday’s close. But given its reluctance to break above the July high, moves towards it could be eyes as favourable for bears to fade into for a near-term move lower.

Also note how choppy price action has generally been around current levels on the weekly chart, with solid sell weeks forming in July and August. And given last week’s Doji beneath the July high, perhaps we’re heading towards a phase of NZD/USD outperformance of AUD/USD, which would equate to a bearish AUD/NZD.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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