AUD/NZD will now depend upon the RBA this week

• AUD/NZD bumps along at the start of the week as traders get set for the RBA.
• The cross is moving in tandem with the moves at the central banks. 

At 1.1068, AUD/NZD is flat at the start of the week within a 1.1067/78 range so far for the Asian session as markets look ahead to what is expected to be a busy week in forex and the Aussie especially considering the Reserve Bank of Australia. 

The RBA meets on June 7 following the Board’s decision last month to raise the cash rate by 25 basis points and a further 40 basis points are expected this time around.  As analysts at Westpac noted, the Australian Gross Domestic Product surprised to the upside in the first quarter of 2022, gaining 0.8% to be 3.3% higher than a year ago. 

''The best policy for the RBA Board will be to raise the cash rate by 40 basis points. The RBA is well “behind the curve”; has seen further threatening evidence around inflation and inflationary expectations since the last meeting and needs to make a clear statement that, like most developed nations, Australia is facing a formidable inflation challenge which needs a stronger early response than the minimum 25 basis point gesture,'' the analysts said. 

''Although the Board meets more frequently than other central banks, the need for a decisive move when rates are extremely stimulatory and the clear need to manage inflationary expectations makes a strong case for a 40 basis point decision. Taking back the emergency cuts in 2020 would be a very important symbol of the Bank’s clear intentions to address the inflation challenge. Given that the Board actively considered 40 basis points at the May meeting we think it is much more likely that the 40 basis point option will be taken.''

Meanwhile, for today, the next risk event will come in the May Caixin services PMI. This is expected to post a significant improvement although the sector is still under pressure from COVID-19 disruption. However, the official PMI survey suggested that economic activity has still not turned around.

''While manufacturing and non-manufacturing PMI picked up by 2.2pts and 5.9pts from April levels, respectively, both indices stayed below 50 for a third straight month, showing a MoM contraction in new orders, production and business activity,'' analysts at Standard Charted explained. ''We noted signs of improvement towards end-May, which may not have been captured by the PMI survey, as Shanghai started reopening businesses and relaxing stringent restrictions in phases from mid-May.''

Meanwhile, as for the NZ dollar. Bloomberg wrote an article that was saying that the RBNZ has the least work to do (as measured by the gap between the current OCR and one implied by the Taylor rule).

The article stated that the European Central Bank, Bank of England, RBA and Federal Reserve have the most work to do (in that order).

''That fits with our sentiments, but given what’s already priced in and projected will well and truly close that gap, and how quickly the RBNZ has got to where it is now, that also speaks to heightened hard landing risks, and the NZD peaking before others,'' analysts at ANZ Bank argued.