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The AUD traded $US0.70-$US0.7240 in the past week, waxing and waning on fluctuations on risk appetite, equity movements and ‘swine flu’ fears. Top tier data post CPI has been thin on the ground, but we suspect usual currency fundamentals will continue to be ignored as swine flu alerts dominate.

On the horizon is the annual Budget, with the Treasurer and Finance Minister clearly stating that revenues have been slashed in the wake of the global recession, via the devastating impact on commodity prices and hence company profits. Analysts suspect revenues will be weaker for longer as unemployment rises and personal taxation revenues dry up also. We look for budget deficits to top 5¾% of GDP over the next two years, a far cry from consecutive surpluses banked prior to the credit crunch. Subsequently, this Budget update (May 12) will be market moving, the first time in years.

It is consensus for the RBA to remain on hold at 3% at next week’s RBA Board meeting. Given the weakening labour market and falling inflation there is always room for a surprise easing, given the last easing was all but ignored by the major banks, analysts and financial markets. The bottom line? Between monetary and fiscal policy, the tilt for the AUD is still down, just not excessively so.

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While the NZD has rallied and sold off largely in lock-step with the AUD on fluctuating risk appetite, some NZD friendly data has been released recently, very unsupportive of the long AUD/NZD recommendation. Frustratingly, 1.275 appears to be a resistance level, rejected three times in the past week but we remain of the view that patience will be rewarded.

Favourable March qtr trade surplus data and a spike higher in businesses ‘own activity’ - a key predictor of GDP growth – were two NZD friendly news stories. However, there are dark sides to these silver linings, as the favourable trade
balance is merely the result of a slump in import demand (due to a dead domestic economy) while we suspect the pickup in business confidence was taken pre-swine flu. As New Zealand heavily relies on transportation, agriculture and tourism, a whiff of pandemic would swiftly pressure sentiment to the downside.

As we go to press, the RBNZ has made its decision on monetary policy. Whether the RBNZ reduces the cash rate by 25bp or 50bp, key is the wording of the accompanying statement. We need to see “low cash rates for the foreseeable future” to offset any market pricing reflecting that the RBNZ is done, and therefore the next move is up. Either way, the markets persist in underpricing decisive RBNZ action, and we see further downside ahead for the NZD.