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AUD/NZD at 13-year highs: How far can the Aussie rally extend?
Key takeaways:
- Australian inflation is heating up: Headline CPI rose to 4.3% in September, while underlying inflation reached 3.6%, reinforcing expectations of further RBA tightening.
- RBNZ surprises with a hold: New Zealand's central bank kept rates at 2.75%, disappointing expectations for a hike, but its narrow 4–3 vote suggests a hawkish turn remains possible.
- AUD/NZD targets 1.27–1.28: The cross has broken above 1.25, although stretched valuations and the possibility of a December RBNZ hike could limit further upside.
Why is the Aussie outperforming the kiwi?
The interest-rate story across the Tasman is shifting in Australia's favour.
Australia's September headline inflation accelerated to 4.3% year-on-year from 4.0% in August, while trimmed mean inflation, a measure of underlying price pressures, increased to 3.6% from a revised 3.5%. Housing inflation remained elevated at 5.2%, while transport prices surged 8.7%, reflecting higher fuel costs.
The figures suggest Australia's inflation problem is not going away quickly, strengthening expectations that the Reserve Bank of Australia (RBA) may need to raise rates further.
Meanwhile, the Reserve Bank of New Zealand (RBNZ) surprised markets by holding its policy rate at 2.75%, rather than delivering the widely anticipated hike.
That has shifted the relative interest-rate outlook in favour of the Aussie. However, the RBNZ's narrow 4–3 vote is an important warning against becoming too bearish on the kiwi. It suggests the central bank remains close to tightening, with another opportunity in December. If the RBNZ turns more hawkish, the expected interest-rate gap between Australia and New Zealand could narrow again, helping NZD recover.
For currency markets, it is not just the direction of interest rates that matters, but also the timing and speed of policy changes.
AUD/NZD outlook: Is 1.28 the next stop?
AUD/NZD has climbed above 1.25, reaching levels last seen in 2013. The move has also taken the pair above significant long-term technical resistance around 1.2354.
The technical picture now suggests:
- 1.27–1.28: Potential upside target over the next 1–3 months if RBA hawkishness persists.
- 1.29: A longer-term possibility if the policy divergence widens further.
- 1.2350: Important support. A sustained break below this level could signal fading bullish momentum.
What could derail the Aussie rally?
The biggest risk is that markets have moved too quickly in pricing the divergence. AUD/NZD is already trading above levels historically suggested by relative interest rates, leaving it vulnerable to a reversal.
The RBNZ's close vote is particularly important. A December rate hike, or even increasingly hawkish guidance before then, could narrow the expected policy-rate gap and trigger a kiwi rebound. Likewise, any signs of cooling Australian inflation could reduce expectations of further RBA tightening.
Higher oil prices add another complication. They could keep Australian inflation elevated, but also weaken global risk appetite and weigh on both currencies.
Bottom line: We see scope for AUD/NZD to extend towards 1.27–1.28, supported by Australia's inflation outlook and the technical breakout. However, this is not necessarily a sustained one-way trade. The RBNZ is still in the tightening game, and if it moves more decisively in December, the relative-rate story could shift back in the kiwi's favour. After the sharp rally, pullbacks may offer better risk-reward than chasing the move.
The targets are scenario-based estimates, not guaranteed price outcomes. This commentary is for general information and does not constitute personalised investment advice.