AUD/NZD holds in a tight spot, bears to challenge bull's dominance

It is calm out there but the bulls are in charge, for now.

AUD is catching a bid in Asia, with prospects of the RBA moving to action later in the year.

The Aussie has benefitted from some hawkish sentiment coming through the wires of late as it plays catch up to the kiwi that has dominated in recent times. The divergence between the two central banks exists, but the gap is a tough narrower despite the dovish tilt at the last Reserve Bank of Australia meeting.

The February board meeting delivered the cash rate at 0.1% and pushed back against the notion that a rate hike was urgent. However, as expected, the bank was ending its bond purchase (money printing or QE) program this month which was accompanied by some upbeat commentary. This has led to some economists calling for hikes towards the end of 2022.

Former RBA Edwards: RBA could raise interest rates four times in quick succession late in 2022

For instance, Economist John Edwards, who once sat on the policy-setting board of the Reserve Bank of Australia, said in an interview earlier today that the RBA could raise interest rates four times in quick succession late in 2022.

Mr. Edwards warns that the cautious plod of the RBA could end quickly. Meanwhile, analysts at ANZ bank explained that they ''think the RBA‘s wages outlook is too pessimistic which lies behind our expectation that the RBA will begin raising the cash rate in the second half of 2022.'' Westpac’s view remains for the RBA to raise the cash rate to 0.25% in August and to 0.50% in October.

As for the kiwi, there is plenty out there for the Reserve Bank of New Zealand to start taking action and to lift the OCR. ''While higher interest rates are normally a positive, its less so when other countries are also raising rates. Additionally, fears of a “hard landing” and housing market vulnerabilities are weighing on the NZD,'' analysts at ANZ bank argued.

The analysts have noted that the NZD is being buffeted by opposing cross-currents. ''Commodity prices are booming and the recovery remains robust. Annual inflation has risen sharply (to 4.9%) and the unemployment rate has fallen to a modern-era record low of 3.2%.''

''While we recently downgraded our forecasts for the NZD and AUD by a few cents, both are expected to appreciate from here, but to a lesser degree, with the NZD expected to climb gradually to 0.70 by year-end.''