We are long AUD/NZD heading into RBNZ meeting – RBC Capital Markets

The Global FX Strategy team at RBC says that the RBNZ could attempt jawboning the NZD through dovish comments… leading to a flatter yield curve. Hence, the team is bullish on the AUD/NZD cross ahead of the RBNZ rate decision. 

Key points

NZD spiked on an increase in 2y inflation expectations to 1.92% (Q1 survey) from 1.68% (Q4 survey), although the bounce just unwound the drop in expectations of 2016, and expectations remain low by historical standards. 

With the forward curve in NZ already mostly priced for a hike this year, we would fade this strength. The RBNZ meets on Thursday, and the main news it needs to take on board since its last meeting is a ~3% rise in the exchange rate (TWI basis). 

We see significant risk that the central bank tries to talk the currency down either directly or indirectly through a dovish statement that flattens the forward curve, and we are long AUD/NZD heading into that meeting.