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Analysis from Bank of America (BofA) suggests that the Australian dollar (AUD) may strengthen against the New Zealand dollar (NZD) over the medium to long term.
BofA’s economists predict a divergence in policy rates between the Reserve Bank of Australia (RBA) and the Reserve Bank of New Zealand (RBNZ), which could lead to a wider rate differential favoring the AUD/NZD pair.
The bank’s economists foresee the RBNZ cutting rates by 125 basis points for the remainder of the year, compared to the 68 basis points currently priced in by markets. Conversely, they expect the RBA to cut rates by 50 basis points, against the 63 basis points already anticipated by the market. This mismatch in expectations points to potential gains for the AUD against the NZD in the future.
In the short term, the 14-day Relative Strength Index (RSI) indicates that the AUD/NZD pair is oversold. However, BofA remains cautious, referencing past instances, such as in October and November 2022, when similar oversold signals did not result in a sustained reversal. At that time, the AUD/NZD pair declined from an initial oversold signal at 1.1075 to a final signal at 1.0515.
The bank’s Liquid Cross Border Flows (LCBF) indicators suggest that hedge funds are currently short on NZD. If these positions are unwound, it could lead to a significant drop in the AUD/NZD pair. Despite this, BofA considers the 200-week moving average, approximately at 108.50, as a more reliable support level for considering potential upside in the pair.
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