The Australian dollar (AUD) is poised to maintain its recent outperformance against the New Zealand dollar (NZD) as the Reserve Bank of New Zealand (RBNZ) adopts a more dovish tone. Several factors, including divergent inflation trends between the two economies and potential shifts in monetary policy, suggest that the AUD/NZD pair could see further bullish momentum.

Diverging Inflation Trends: Australia vs. New Zealand

Inflation trends in New Zealand and Australia have been on different trajectories, with New Zealand’s core inflation decelerating at a faster pace than Australia’s. In the second quarter of 2024, New Zealand’s core inflation rate dropped to 2.8% year-on-year (y/y), down from 3.7% y/y in the first quarter. This marks the slowest pace of growth in three years. In contrast, Australia’s core inflation remained relatively sticky, recording a rate of 3.9% y/y, only marginally lower than the 4% y/y observed in the first quarter.

This divergence in inflationary pressures reflects the differing economic conditions in the two countries. New Zealand’s higher interest rates have contributed to a slowdown in economic activities, leading to a sharper decline in inflation. Meanwhile, Australia’s inflation has been more resilient, supported by a stronger domestic economy.

RBNZ’s Dovish Stance: Preparing for a Rate Cut?

The Reserve Bank of New Zealand (RBNZ) is set to announce its monetary policy decision on Wednesday, 14 August, accompanied by its quarterly Monetary Policy Statement. The central bank is widely expected to keep its official cash rate (OCR) unchanged at 5.5% for the ninth consecutive meeting. However, the focus will be on the guidance provided by the RBNZ, as recent economic data suggests that the central bank may be leaning towards a more dovish stance.

In its previous quarterly statement released in May, the RBNZ indicated that the first interest rate cut in New Zealand would occur after the second quarter of 2025. However, given the recent lackluster data on growth and inflation, there is a growing likelihood that the RBNZ may bring forward its projected rate cut to the first half of 2025. The significant decline in New Zealand’s core inflation, combined with a slowdown in economic activities, may prompt the RBNZ to adjust its policy outlook.

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AUD/NZD: Bullish Outlook Supported by Key Technical Levels

The AUD/NZD pair has experienced a modest decline of 2.8% from its mid-July highs, stalling at a key medium-term support level between 1.0890 and 1.0840, which also coincides with the 200-day moving average. Despite this pullback, the overall trend remains bullish, supported by the divergence in inflation trends and the potential for a dovish RBNZ.

Price action in the AUD/NZD pair has been oscillating within a medium-term ascending channel since the February 2024 low of 1.0570. A break above the 1.1030 intermediate resistance level could pave the way for a retest of the 1.1165/1190 medium-term resistance area. However, a break below the 1.0840 support level would invalidate the recovery scenario and could expose the pair to further downside risks, with the next medium-term support level at 1.0735.

Potential Scenarios for RBNZ’s Monetary Policy Decision

Given the current economic landscape, the RBNZ faces several potential scenarios in its upcoming monetary policy meeting:

1. *Dovish Hold:* The RBNZ may choose to keep the OCR unchanged at 5.5% while signaling the possibility of an earlier-than-expected rate cut in 2025. This scenario would likely reinforce the AUD/NZD’s bullish trend, as investors anticipate a widening interest rate differential between Australia and New Zealand.

2. *Neutral Hold:* The RBNZ could maintain a neutral stance, keeping the OCR steady without providing clear guidance on future rate cuts. This would likely result in limited movement in the AUD/NZD pair, with investors awaiting further economic data before making significant moves.

3. *Hawkish Hold:* Although unlikely, the RBNZ could surprise markets with a more hawkish tone, emphasizing concerns about inflation and delaying any potential rate cuts. This scenario would likely support the NZD, leading to a potential correction in the AUD/NZD pair.

At Wealth Craft Network, our robo trading platform continuously monitors these scenarios, allowing investors to adjust their positions in real-time based on the latest market developments. By leveraging cutting-edge technology and data-driven strategies, we help investors capitalize on opportunities and mitigate risks in a rapidly changing market environment.

Looking Ahead: Implications for AUD/NZD and Investor Strategies

As the RBNZ prepares to announce its monetary policy decision, investors should remain vigilant to potential shifts in the AUD/NZD pair. The divergence in inflation trends between Australia and New Zealand, coupled with the RBNZ’s dovish outlook, suggests that the Australian dollar may continue to outperform its New Zealand counterpart in the medium term.

For investors utilizing Wealth Craft Network’s robo trading platform, this environment presents opportunities to capitalize on the AUD/NZD bullish trend. By staying ahead of market movements and adjusting strategies in real-time, our platform ensures that investors are well-positioned to navigate the complexities of the forex market.

In conclusion, the RBNZ’s upcoming monetary policy decision will be a key event for the AUD/NZD pair. Whether the central bank signals an earlier rate cut or maintains a cautious stance, the implications for the currency pair will be significant. At Wealth Craft Network, our robo trading platform is designed to help investors stay ahead of these developments, providing the tools and insights needed to succeed in a dynamic market.