[LFX]

The RBA hike this week means the cash rate differential between AU and NZ stands at an unprecedented 75bp in AU’s favour. Following the move, the spike in near-term AU rate expectations now has the markets discounting an unrealistic spread widening in AUD’s favour over the next six months. Look to fade rallies in AUD/NZD that take the pair toward the top of the recent 1.19-1.24 range.

NZ’s dependence on offshore financing to fund its twin deficits, has forced it to maintain an almost permanent positive spread with its neighbour, averaging 100bp over the last 7 years.

If futures markets’ pricing were correct, the negative spread would be set to blow out to 150+bp from a historical high of -100bp (3m rates) after this week’s news.

It highly unlikely that the NZ will be able to sustain a negative cash rate spread
much greater than the current 75bp for any length of time and the RBNZ will be forced before long too follow the RBA’s lead.

AUD/USD Technical Trends
Current uptrend highlights resistance at 0.9208 and 0.9278. This week’s unexpected rate hike by the RBA has pushed AUD/USD above the rising wedge top at 0.8893 and broke resistance at 0.9033. With the daily studies moving from
overbought to more neutral levels recently, the breakout from the wedge pattern has added to upside price momentum and sustained the intermediate uptrend in AUD/USD. The recent close above 0.9033 highlights the congestive resistance levels from April/May 2008 at 0.9208 and 0.9278 respectively. Prices will have to pierce the ascending channel base at 0.8538 in order to end the current uptrend.

NZD/USD Technical Trends
NZD/USD is currently testing an important resistance level denoted by the ascending channel top at 0.7413. With the daily studies recently moving from overbought to more neutral levels, note that a daily close above 0.7413 should generate new upward price momentum that would highlight resistance levels at 0.7488 and 0.7634. Support at 0.7310 and 0.7152 is expected to attract buying interest during pullbacks based on the intermediate uptrend that is in place. Note that prices will have to register a daily close below the ascending channel base at 0.7090 in order to nullify the current uptrend.