The currency pair AUD/NZD has shown a choppy uptrend over the past year, influenced by numerous factors. A significant element in this dynamic has been the contrasting monetary policy decisions of the Reserve Bank of Australia (RBA) and the Reserve Bank of New Zealand (RBNZ), which have caused the New Zealand dollar (NZD) to underperform relative to the Australian dollar (AUD).

As of August 2024, the RBNZ began cutting rates, slashing them by 175 basis points. Following its latest rate cut of 50 bps, the RBNZ has indicated that two additional cuts of 25 bps may occur around April and May of 2025. This is in stark contrast to the RBA, which maintained a hawkish stance in 2024, only beginning its easing cycle recently. While AUD/NZD surged close to recent highs, it was unable to break through, signaling a potential shift in momentum.

The recent RBNZ signals, suggesting that the current easing cycle may soon come to an end, imply that the market may have less reason to short the NZD against the AUD. Investors, priced in for further aggressive cuts from the RBNZ, are likely to reevaluate their strategies. The future trajectory of AUD/NZD will also be shaped by the less certain outlook for RBA rates in the coming months. Market expectations currently point to a 25 basis point cut in both May and August of 2025, but there’s still room for shifts in sentiment. As such, the outlook for AUD/NZD might stall and enter a phase of range trading around the 1.11 area.

The RBNZ had been one of the first major central banks to hike interest rates in the post-pandemic period. By October 2021, the official cash rate (OCR) was raised to 0.5%, eventually reaching 5.5% by May 2023. However, aggressive rate cuts followed as New Zealand faced a slowdown, with the Q3 2024 GDP data showing a concerning 1% y/y fall. Despite these challenges, RBNZ Governor Orr remained optimistic about New Zealand’s economic future, citing the improvement in inflation and the potential for growth in 2025, bolstered by lower interest rates stimulating spending. With export volumes also supported by a weaker currency, the outlook for employment growth was positive, though global uncertainties, including geopolitical risks, could temper these expectations.

On the other side of the Tasman Sea, the RBA’s latest decision to cut rates by 25 bps is aligned with market expectations, as weaker-than-expected Australian Q4 inflation data provided the justification. Despite this cut, RBA Governor Bullock made it clear that further rate cuts were not guaranteed. She pointed to unexpected strength in the labor market and other indicators that suggested tightening conditions. Although the RBA has taken this cautious step, it remains hesitant to commit to an aggressive easing cycle. The market is priced for additional rate cuts, but the RBA’s cautious stance has left room for uncertainty regarding Australia’s monetary policy path.

The immediate future for the AUD/NZD pair will hinge on Australia’s labor market data, with the upcoming January 2025 release likely to be a critical factor for the AUD. Meanwhile, New Zealand’s economic outlook, bolstered by falling inflation and an expected recovery in economic activity, suggests that the NZD might begin to stabilize against its Australian counterpart.

Overall, while AUD/NZD is experiencing a turning point, the next few months will be crucial in determining the longer-term direction. Market participants will need to closely monitor the central banks’ actions and economic data releases to assess the likely trajectory for this currency pair. Range trading around the 1.11 level seems a likely scenario as both currencies adjust to their respective monetary policy environments.