Ceasefire deal and divergent policies
The MUFG EMEA report highlights the market's optimism regarding a ceasefire deal impacting the Strait of Hormuz, stating this development is largely priced into current Brent crude prices, which have fallen nearly 20% since mid-May. The desk interprets this as a critical juncture that could influence USD and commodity-linked currencies such as AUD and NZD. In addition to oil's price trajectory, the report notes an unprecedented drop in AUD/NZD, reflecting international sentiment on Australian economic resilience versus global risks. Per the full note, this backdrop sets the stage for significant volatility amongst Australian and New Zealand dollar pairs in the near term.
What the desk is arguing
The desk asserts that the pricing of the ceasefire deal and its effects on oil prices will create headwinds for the Australian Dollar. MUFG notes that optimism surrounding Brent crude's future trajectory has contributed to its decline by almost 20%, which could adversely impact currencies tied to commodity exports like the AUD.
Data from the report emphasizes that the AUD/NZD pair has seen its largest fall since 2016, reflecting shifting market dynamics influenced by geopolitical factors. This depreciation underscores the market’s reevaluation of risk sentiment, further solidifying the desk's outlook on these currencies.
Where it sits in our coverage
The consensus target for AUD/NZD stands at 1.075, with a range between 1.04 and 1.12. Key firms include: - jpmorgan: target of 1.10, tenor Mar26 - bofa: target of 1.04, tenor Mar26
This perspective aligns with jpmorgan's stance while it diverges from bofa's more cautious outlook on the pair's future performance, suggesting a bullish sentiment compared to their lower target.
How other firms see it
Firms such as jpmorgan and citi are aligned in viewing AUD as potentially undervalued given the oil price dynamics, while bofa maintains a bearish outlook on AUD. The market sentiment seems concentrated around commodity price movements, affecting currencies across the board, particularly in pairs like AUD/JPY and NZD/USD, which closely correlate with external economic conditions and monetary policies.
What the calendar says
No major calendar events are anticipated that could directly impact the AUD/NZD in the coming weeks, leaving traders to focus on evolving geopolitical landscapes and commodity price shifts.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Ceasefire deal impacts oil prices and currency valuations.
- 02AUD/NZD sees significant drop, reflecting risk sentiment shifts.
- 03Market dynamics influenced by broader geopolitical factors.
Market implications
Traders should watch the AUD/NZD closely, particularly if it approaches the resistance level around 1.075. Observing Brent crude to gauge any further price movements will also be paramount, as this dictates commodity-linked currency performance.
Risks to this view
A sudden shift in geopolitical sentiment, such as a breakdown in ceasefire negotiations or an increase in tensions, could lead to a rapid appreciation of AUD, invalidating the current bearish stance. Additionally, unexpected intervention from central banks or significant changes in commodity supply could also disrupt price trajectories.
Reaching a deal to extend the ceasefire for 60 days and reopen the Strait of Hormuz is now largely priced. Brent crude oil is down close to 20% from the high on 18th May reflecting the optimism that a deal would be done. Derek Halpenny, Head of Research Global Markets EMEA & International Securities talks to James Roulston in FX Institutional Sales about what this means for rates and the US dollar.
Derek also talks to James about the intervention data from Japan and the biggest AUD/NZD drop since 2016.
Sources & References
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