Australian Dollar Extends Broad Recovery while Strategists Call for Higher AUD/NZD Rate

-AUD/USD rate breaks above key level, Pound-to-Aussie falls.

-March labour market report key to whether uptrend continues.

-AUD/NZD rate is a buy say ANZ Research and Societe Generale.

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The Australian Dollar extended its nascent recovery into the final session of the week as risk assets benefited broadly from an easing of fears over a possible conflict in the Middle East, while some strategists are suggesting the Antipodean currency may continue to parry its doubters for while yet.  

These calls come at the tail end of week where the Australian currency has recoiled sharply from an earlier sell-off that pushed it close to a new two-year low against Pound Sterling and threatened a break below a multi-year trend line in the AUD/USD exchange rate. 

However, the forthcoming week also promises an action-packed economic calendar that will see a raft of key statistics emerge from Australia, the UK, US and New Zealand. All of these numbers have the potential to scupper or advance the Aussie Dollar's retracement higher, although strategists will be paying particularly close attention to the Australian labour market report for March. 

"We think the reaction function for the AUD will be asymmetric. While a positive surprise in job growth will drive some short-term gains for the Aussie, a miss has the potential to lead to a larger, more persistent loss. That said, if the unemployment rate falls, positive momentum for the AUD may last longer," says Giulia Lavinia Specchia, an FX strategist at ANZ Research, a division of Australia and New Zealand Banking Group.

Markets are looking for the March Australian unemployment rate to hold steady at 5.5% when the number is released next week and for the economy to have added 20,000 new jobs during the month. As indicated by ANZ, this simple "in line" result will provide only a short and momentary boost to the Australian Dollar and for a more sustained reaction, a "better than expected" result will be needed. 

A continued improvement in the labour market is critical to a pick up in Australian wage growth further down the track and it's this that is key to if, and when, the Reserve Bank of Australia raises its interest rate. And it's keeping hopes of an eventual interest rate rise alive, or avoiding a further deterioration in these, that is the key to whether the Australian Dollar extends its retracement higher or ultimately succumbs to renewed weakness. 

"AUDUSD bulls were unable to break above the 0.7760-resistance but with momentum still rather bullish, they could try again. Upsides remains a grind for now as this pair remains within the descending wedge that has formed since the start of the year. A break of the 0.7788- resistance, marked by the 100-DMA could be a bullish signal and a breakout of the descending wedge," writes Satkiandi Supaat, an FX strategist at Maybank, in a note Friday.

Above: AUD/USD rate shown at daily intervals.

Australia's Dollar did indeed stage another run at the 0.7760 level Friday. In fact, it overcame this barrier during moring trading and was quoted as high as 0.7808. It also continued to advance against Sterling despite broad strength in the British currency, with the Pound-to-Aussie rate dropping 0.32% to 1.8294.

The Aussie Dollar is the only developed world currency to have bested Pound Sterling this Friday. But again, forthcoming data will be key to whether this trend continues.

Above: Pound-to-Aussie rate shown at daily intervals.

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AUD/NZD Recovery in Sight? 

The AUD/USD and Pound-to-Aussie rates are not the only Australian currrency pairings to have seen a notable boost Friday as the AUD/NZD rate has also been lifted from close to a year-long low and some strategists are now suggesting that this pair could also have legs to go further. 

"Over the past few months, the AUD/NZD has been facing renewed selling pressure, falling to 1.05, the lowest level since July 2017. This weakness occurred despite relative stability in our fair value estimate, which currently sits at 1.12," says Phil Borkin, a senior macro strategist at ANZ Research. "That degree of misalignment is certainly not uncommon in an historical context. Nevertheless, it does raise the question of whether the potential for retracement is growing, which we believe it is."

The AUD/NZD rate was quoted 0.61% higher at 1.0577 Friday after having fallen briefly below the 1.05 threshold during the previous session. It is still down more than 3.5% for the year to date after having been jilted by the deterioration in Australian rate expectations, first-quarter volatility in financial markets that saw "risk-off" trading conditions prevail for much of the last two months and falling commodity prices.

However, there are other grounds to think that the worst of this is now in the past. For a start, US-China trade hostilities that riled markets during the March month have recently cooled while iron ore prices also appear to have bottomed. In addition, prices of whole milk powder, which is New Zealand's largest export, may be about to take a dip lower. This would be bad for the Kiwi currency and could support a continued rise in the AUD/NZD rate.

Above: AUD/NZD exchange rate shown at daily intervals.

"Prices have held up remarkably well over recent months, hovering just over USD3,200/tonne, on the back of solid Chinese demand. That demand is expected to persist. However, with additional supply being added to the GDT platform and Europe set to become more aggressive in export markets as its seasonal milk flows increase, this could weigh on prices in the near-term," says ANZ's Borkin. 

The ANZ team also flag the possibility of a disappointing first quarter inflation number from New Zealand next week, which would be a negative development for the Kiwi Dollar and a positive one for the AUD/NZD rate. They have advocated that clients of the bank bet on a rise in the exchange rate, targetting a move up to 1.08. This chimes with what others have been saying about the AUD/NZD exchange rate of late.

"The decline in the AUD/NZD exchange rate is not supported by rate differentials," says Alvin Tan, an FX strategist at Societe Generale. "A relaxation of US-China trade tensions would boost AUD, and we are looking for the rate differential to move further in the Aussie dollar’s favour with an RBA rate hike this year, while the RBNZ is expected to stand pat."

Tan and the Societe Generale team wrote Friday that the risk-reward balance is favourable for those betting on a rise in the AUD/NZD rate. They have advocated that clients of the bank do this, entering the trade around 1.0550 and targetting a move up to 1.10. They have recommended a stop loss at 1.0490.

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