AUD/NZD: Flows point to growing appetite for upside - Westpac

Richard Franulovich, Research Analyst at Westpac, suggests that their real money and sovereign client flows point to an improved flow based backdrop for AUD/NZD near term strength.

Key Quotes

“Appetite for NZD has been fairly neutral in recent months both on the real money and sovereign fronts.”

“Against that real money appetite for AUD has been firming while sovereign interest in AUD continues to cool. The lack of sovereign interest in AUD fits the broad global trend of falling central bank reserves as capital outflows from Asia continue apace. Firming real money demand for AUD of course does not fit the Trump reflation story but it is not entirely out of sync with the atmospherics around AUD –China’s growth picture remains stable, bulk commodity prices have risen sharply and the RBA appears reluctant to cut rates. Either way, persistent real money inflow into AUD outpaces the lack of sovereign interest leaving the overall long term client flow picture a net positive for AUD  and overall much stronger than in NZD.”

“In the last 18 months appetite for AUD relative to NZD has taken on a contrarian profile vis-à-vis price action in the cross. Every time the cross has made a sustained push lower demand for NZD has evaporated relative to AUD and vice versa (see panel two). In the last three months flows into AUD have once again firmed relative to NZD, consistent with the cross trading with a heavy bias below 1.08 over much of that period.”

“It’s too early to tell whether a more profound shift in AUD client demand relative to NZD is taking place but for the time being the clear message is that there is more appetite for AUD than NZD. That would be consistent with the AUD/NZD cross finding a low recently just below 1.04. Of course as the cross continues to firm the contrarian profile to our flows suggests that appetite for AUD will begin to dry up relative to NZD, but we are not there yet.”