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Australian Dollar Cross Pick 05.31.2012

Australian Dollar Cross Pick 05.31.2012

David Song, Strategist

We added to our short AUDNZD from 1.3000, increasing our exposure at 1.2902. In turn, we moved out net stop to our initial cost (1.3000), and will maintain an open target as we expect to see the reversal in the aussie-kiwi to gather pace in June. As the Reserve Bank of Australia is widely expected to lower the benchmark interest rate further next week, we should see the New Zealand dollar outperform its Australian counterpart, and we’re still looking for fresh 2012 lows in the exchange rate amid the disparity in interest rate expectations. According to Credit Suisse overnight index swaps, the RBA is expected to lower the cash rate by nearly 150bp over the next 12-months, while market participants see the Reserve Bank of New Zealand cutting borrowing costs by at least 25bp amid the slowdown in global growth. However, as RBNZ Governor Alan Bollard expects the rebuilding efforts from the Christchurch earthquake to boost private sector activity, the central bank may retain its wait-and-see approach throughout 2012, and Mr. Bollard may talk down speculation for a rate hike at the next meeting on June 13 as a stronger recovery raises the risk for inflation.

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