**Australian Dollar Expected to Gain Against New Zealand Dollar: Insights from Bank of America**

Recent analysis from Bank of America (BofA) indicates a likely strengthening of the Australian dollar (AUD) against the New Zealand dollar (NZD) in the medium to long term, presenting an intriguing opportunity for forex traders.

BofA’s economists anticipate a significant divergence in monetary policy between the Reserve Bank of Australia (RBA) and the Reserve Bank of New Zealand (RBNZ). This divergence is poised to widen the rate differential in favor of the AUD/NZD currency pair. More specifically, BofA predicts that the RBNZ may cut interest rates by 125 basis points for the remainder of the year, compared to just 68 basis points currently priced in by market expectations. Meanwhile, the RBA is forecasted to lower rates by 50 basis points, slightly below the anticipated 63 basis points by the market.

Such a discrepancy in rate expectations may pave the way for potential gains for the AUD against the NZD in the coming months.

From a technical analysis perspective, the 14-day Relative Strength Index (RSI) suggests that the AUD/NZD pair is currently oversold. However, traders should exercise caution. Historical trends, such as those observed in October and November 2022, indicate that prior oversold signals, including an initial reading around 1.1075, did not culminate in lasting upward momentum. Instead, the pair experienced a notable decline, reaching a low of 1.0515.

BofA’s Liquid Cross Border Flows (LCBF) indicators also reveal that hedge funds are presently holding short positions on the NZD. If these positions are unwound, there is potential for a sharp decline in the AUD/NZD pair. Notwithstanding this risk, BofA has identified the 200-week moving average, around the 1.0850 level, as a critical support area to monitor for any potential upside in the pair moving forward.

For forex traders, this analysis suggests a careful strategy: while there are indicators favoring the AUD in the long run paired with potential short-term volatility, attention to technical levels and broader market sentiment will be essential in navigating trades in the AUD/NZD pair.

Image from AFP via FMT licensed under CC BY 4.0

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