Asia Focus: Firmer Upside In NZD, While AUD Lags Behind

Both AUDUSD and NZDUSD were given a strong boost this week after the decision by the US Federal Reserve to maintain the pace of asset purchases, but unlike Aussie, NZD is showing greater strength that is fundamentally supported by a better domestic outlook.

Weaker Aussie outlook
AUDUSD shrugged off the more dovish Reserve Bank of Australia (RBA) minutes which stated that the board is open to the possibility of further rate cuts. Perhaps the market is placing too much focus on the “no move imminent” part of the RBA statement.

Despite Australia’s unemployment rate at a four-year high, consumer and business confidence is picking up. Better data from China suggests further support for iron ore trade, and the new government is expected to move forward with more business friendly policies and infrastructure stimulus to ramp up hiring.

Until we see proof in the data to suggest continued domestic growth, a higher AUD backed by a promising outlook is not enough. Expect the weaker USD driver to subside as taper talk returns later this year, which could limit the upside and pressure AUD back to fairer values. The RBA certainly wants a weaker AUD, and with some discussion about rising housing prices within the board, we could see further dovish jawboning for the remainder of the year to weaken the currency without touching the official cash rate.

For now, AUDUSD still has room to rise in the wake of the Fed decision, with the 0.9500 level tested as it approaches June highs around 0.9650. A return to the 0.9250 or 0.9200 level could be supportive along a rise off summer lows, but a break lower could lead to further weakness. AUDUSD saw a nice rise in the past two weeks, but if USD weakness begins to fade, trading this pair could get tricky. Instead, AUDNZD could be a safer short with clearer fundamentals.

Stronger Kiwi outlook
NZD is the better play going into 2014, especially after the Reserve Bank of New Zealand (RBNZ) stated that rate hikes may be required for 2014, which sparked a rise from last week. The next boost through 0.8250 was after the Fed decision not to taper, and the third rise through 0.8350 was on the backs of better than expected New Zealand Q2 GDP data. The rise is losing a bit of momentum from the Asia session, and NZDUSD could see some pressure around 0.8500.