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Fundamental Analysis

AUD/NZD Surges to New 2017 High

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The AUD/NZD has enjoyed a massive rally today, rising a good 270 pips from the low to the high. It all started with stronger-than-expected employment data from Australia, which helped to boost the AUD earlier in the day. Employment in Australia climbed by nearly 20K last month, while the unemployment rate unexpected fell to 5.5% from 5.6%. Meanwhile China's GDP growth slowed down in the third quarter to 6.8% from 6.9%, but this was expected, while industrial production at the world's second largest economy expanded at a faster-than-expected pace of 6.6% in September, up from 6.0% y/y the previous month. With China being Australia's largest trading partner, this was also a piece of good news for the Aussie dollar. In New Zealand, the nationalist New Zealand First decided to support Labour instead of the incumbent National Party. The new coalition government will be led by Labour's Jacinda Adern. Investors are concerned that under the leadership of the Labour party, the government is likely to pursue more aggressive reforms of the Reserve Bank of New Zealand in order to widen the bank's policy focus to cover more than just inflation. This may mean low rates for even longer than would have been the case under a National Party-led coalition. With RBNZ now likely to keep its monetary policy accommodative for longer, the interest rate differential between New Zealand and Australia is likely to narrow, should the RBA decide to tighten its belt in the coming months. Thus, the AUD/NZD exchange rate may appreciate further over the coming months.

From A technical point of view, the AUD/NZD continues to make higher highs and higher lows. The 50- day moving average is now also creating a gap above the 200-day moving average. Both MAs are pointing higher. These technical indications alone tell us objectively that the trend is indeed bullish. Today's latest rally has pushed rates above the old high of around 1.1140, thus creating a new 2017 high. We now anticipate the broken resistance levels, ideally, at 1.1140, or worse the 1.0990-1.1020 range, to offer support upon any short-term pullback. On the upside, some of our near-term bullish objectives include the Fibonacci extension levels at 1.1235 (127.2%) and 1.1350 (161.8%), and round handles such as 1.1300, 1.1400 and 1.1500. The 2015 high, at 1.1680, is our longer-term bullish objective. We will remain bullish on AUD/NZD until and unless price breaks below the most recent low at 1.0895. Either that, of if it forms a clear reversal pattern at higher levels, first.

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