© Reuters.

(Bloomberg) — Divergent monetary policies are fueling sharp gains in the Australian dollar against its New Zealand peer, and analysts see the rally running well into 2021.

A two-year high in the Aussie-kiwi cross that was reached this week may be just a stepping stone on its way to levels last seen in 2016, they say.

HSBC Holdings Plc (LON:) forecasts the pair to rise about 3% to 1.13 by year end while Credit Agricole (OTC:) CIB expects it there by mid 2021. Commonwealth Bank of Australia (OTC:) suggests going long with a target of 1.19, versus just under 1.10 now.

“The main point of difference is monetary policy given only the Reserve Bank of New Zealand is considering negative rates and has been much more aggressive with its QE,” said Tom Nash, strategist at HSBC in Sydney. “Both rate differentials and the rate of change of the respective central bank’s balance sheets are pointing in the direction of a higher .”

While the RBNZ has embarked on large scale bond buying and is now contemplating sub-zero rates, the Reserve Bank of Australia is trying to keep a lid on debt purchases with yield-curve control and has said it is “extraordinarily unlikely” to adopt negative rates.

Adding to the kiwi’s woes is a fresh coronavirus outbreak in Auckland that’s denting consumer confidence, and which has forced a delay in the general election until October.

Swaps traders are pricing 40 basis points of RBNZ rate cuts by July 2021, which would take the cash rate well into negative territory.

The Aussie-kiwi pair has advanced more than 5% this year and on Monday capped 10 straight days of gains, the longest winning streak in almost three decades. The is also the worst-performing currency against the dollar this year.

“Heavy reliance on tourism and education exports and the closure of international borders likely well into 2021, as well as the RBNZ’s threat of implementing negative rates, will lead to some NZD underperformance relative to the AUD,” said Valentin Marinov, head of FX strategy at Credit Agricole in London.

Still, not everyone is predicting the kiwi’s continued slide against its South Pacific peer.

Ranko Berich, head of market analysis at Monex Europe Ltd., expects the Aussie’s rally against the kiwi to wane as New Zealand clamps down on the virus outbreak and investors become used to the RBNZ’s dovish commentary.

“New Zealand’s ‘elimination’ strategy has proven effective in the past and at some point RBNZ rhetoric will lose its ability to verbally suppress the currency,” said Berich. “I’m inclined to view the current spike higher as likely to unwind gradually.”

©2020 Bloomberg L.P.

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