TD Securities strategists focus on AUD/NZD after a sharp post-RBNZ selloff. They argue the start of the Reserve Bank of New Zealand (RBNZ) hiking cycle versus a peaking Reserve Bank of Australia (RBA) cycle should cap the prior AUD/NZD uptrend, but expect short-term consolidation. The team implements a 1m 1.18/1.2050/1.23 AUD/NZD fly, citing historical retracement patterns and limited scope for further NZD-positive surprises near term.

Fly structure for expected consolidation

“AUD/NZD fly into RBNZ hiking cycle. Last week’s RBNZ meeting was a hawkish surprise.”

“That being said, we expect some short-term spot consolidation after this week’s selloff. We enter a long 1m 1.18/1.2050/1.23 AUD/NZD fly structure to express this view.”

“AUD/NZD saw its largest one-day depreciation since July 2016. Across 13 observations of one-day selloffs (20y lookback) that exceeded the move on May 27, AUD/NZD would retrace higher over the next week 69% of the time.”

“With rest of the RBNZ hiking cycle priced-in and little NZ data release in the next month, we believe it’s unlikely for AUD/NZD to fall on further bullish NZD catalysts in the near-term.”

“Risk to the trade is unexpected increase in AUD/NZD vol moving spot price beyond the breakeven levels for the fly structure.”

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