Sean Callow, an analyst at Westpac, believes that the RBNZ’s shock 50bp rate cut on 7 August ignited a steep AUD/NZD rally, from the 1.03 handle to 10-month highs above 1.08 in late September.

• “AUD/NZD has consolidated in a 1.0650-1.0800 range and near term risks seem tilted modestly lower. While Australia’s broad commodity export basket has recovered some of its steep decline in July-August, iron ore has lost momentum this month and the demand outlook suggest further losses. Meanwhileб we have raised our forecast for NZ dairy prices.
• Market pricing for further cash rate cuts has been trimmed for both the RBA and RBNZ, partly in line with global yields as US-China trade tensions have eased but also on local data and the tone of central bank officials.
• The RBNZ has more easing priced in than does the RBA, so based on our forecasts of one more cut each, AU-NZ rate spreads could fall slightly. This suggests the cross spends plenty of time under 1.0700 into month-end.
• But that would be an opportunity to buy, for a multi-month move to 1.1000, backed by fair value estimates holding well above 1.1000. On our calculations, AUD/NZD has been undervalued to some degree since 2016 but the gap has narrowed over 2019.”