TD Securities strategists are focusing on the AUD/NZD currency pair following a significant selloff after the latest Reserve Bank of New Zealand (RBNZ) meeting, which was described as a 'hawkish surprise' [1]. The strategists note that the initiation of the RBNZ's hiking cycle, contrasted with a peaking Reserve Bank of Australia (RBA) cycle, is likely to cap the previous uptrend in AUD/NZD. However, they anticipate a period of short-term consolidation in the currency pair after the recent sharp move [1].
To express this view, TD Securities has implemented a one-month 1.18/1.2050/1.23 AUD/NZD fly structure, citing historical retracement patterns. Specifically, they highlight that AUD/NZD experienced its largest one-day depreciation since July 2016, and in 13 similar instances over the past 20 years where one-day selloffs exceeded the move on May 27, the pair retraced higher over the following week 69% of the time [1].
TD Securities believes that with the remainder of the RBNZ hiking cycle already priced in and limited New Zealand data releases expected in the next month, there is little scope for further NZD-positive surprises in the near term. As a result, they see it as unlikely that AUD/NZD will fall further on bullish NZD catalysts in the immediate future [1]. The main risk to their trade view is an unexpected increase in AUD/NZD volatility that could move the spot price beyond the breakeven levels for their fly structure [1].
CONCLUSION
TD Securities expects the AUD/NZD pair to consolidate in the short term following the RBNZ's hawkish surprise, with historical patterns suggesting a likely retracement higher. With limited upcoming NZ data and the hiking cycle largely priced in, further NZD gains appear unlikely in the near term.