Australian and New Zealand dollars – We downgraded our forecasts

by: Roy Teo

An improvement in consumer confidence in Australia and an unexpected decline in unemployment rate in May triggered some short covering in the AUD. An improvement in risk sentiment in financial markets also supported the AUD to above 0.96 against the USD. We like to highlight that the decline in unemployment rate was due to a lower participation rate and that employers added only 1.1K jobs, lower than 1 year average of 10.37K jobs. We continue to expect the RBA to lower the cash rate by 25bp in July with the RBA minutes on 18 June to give further insight on their monetary policy outlook. We expect any rally in the AUD/USD to above 0.98 to be unsustainable and the pair to trend lower towards 0.90 by the end of this year. The RBA is likely to cut more than what is currently expected. The NZD/USD also recovered, rising from under 0.78 to 0.81 though we expect this rally to fade towards 0.82 given the RBNZ’s view that the NZD remains overvalued. We expect a lower NZD/USD towards 0.76 at the end of this year.