The AUD has been under strong pressure in the past 12-18 months. A slowing Chinese economy, an unwinding housing and mining boom and a dovish RBA have all been contributing factors. Many of these reasons are still valid reasons to be fundamentally negative on Australia, but as we have pointed out since the beginning of the year the AUD was due a tactical rebound.

This theme was given a further boost this week where  Reserve Bank Governor Glenn Stevens’ comments were interpreted as the RBA thinking about ending the easing cycle. According to Bloomberg estimates, the probability of a further RBA cut at the next meeting has declined significantly.

Quote Bloomberg

The odds of a further rate cut at the July meeting declined to 18 percent, from 23 percent at the end of last month, according to data compiled by Bloomberg. The difference between yields on two-year bonds and 10-year debt narrowed to 128 basis points yesterday, the least since July.

Part of the change in language and perception is that the RBA is expected to up its inflation forecast tomorrow, but overall the tactical picture had started to look very oversold for the AUD. We have particularly focused on the AUDNZD

AUDNZD has been a short great trade in 2013 as a bet on the soft commodities of New Zealand versus the hard commodities of Australia.  However, as we pointed out three weeks ago to clients,  indicators were pointing to a retracement which could be exploited by tactical traders.

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Looking at the current 24w trailing return of the pair we are close to a low point only observed 10 times since 1990. More interestingly, a number of fundamental factors would also lead to a constructive view on the AUDNZD. Firstly, the relative level of the OECD LEI (AUD-NZD) is similarly at a low point, but turning up. This indicator provides a decent 5 month lead on the AUDNZD.

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Secondly, the relative current account between Australia and New Zealand is improving in AUD’s favour.

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This has also usually been associated with strength in AUDNZD.