Strategy and tactics AUD report 10 July 2018

NZD/AUD cross rate NZD/AUD cross rate AUD/USD exchange rate AUD/USD exchange rate Strategy and tactics AUD report 10 July 2018 NZD/AUD forecast AUD/USD forecast 0.9800 NZD/AUD cross rate forecast 0.9800 0.8200 AUD/USD exchange rate forecast 0.8200 0.9600 0.9600 0.8000 0.8000 0.9400 0.9400 0.7800 0.7800 0.7600 0.7600 0.9200 0.9200 0.7400 0.7400 0.9000 0.9000 0.7200 0.7200 0.8800 0.8800 0.7000 0.7000 NZD/AUD cross rate Forward curve Forecast (avg for remaining quarter) AUD/USD exchange rate Forward curve Source: Reuters NZD/AUD and AUD/USD CARR summary NZD/AUD: 0.9160 CARR index (average) AUD/USD: 0.7455 NZD/AUD AUD/USD Next month -0.2 0.0 Next three months -0.3 0.0 Next twelve months -0.2 +0.5 The CARR (Central Assumption Rate Reaction) represents the outcome of the key factors (on a -3 to +3 scale) determining the strength of the expected exchange rate movement over the relevant time period. The width of the arrow in right column above highlights the degree of expected NZD/AUD cross rate and AUD/USD exchange rate movement relative to today s spot rate. Full details are on page 2 and 7. Upcoming key data releases Consensus Impact on Date Release Previous forecast NZD/AUD (NZT) (Bloomberg) 17/7 NZ CPI YoY 1.1% 19/7 AU Unemployment rate Core view 5.4% Global risk sentiment around trade tensions have improved slightly, helping the AUD and NZD unwind recent losses. Despite strong growth and relatively firm commodity prices in Australia, the RBA remains well on hold, as does the RBNZ. Growth outlook in NZ is less certain due to softer business confidence. We continue to expect the 0.9000 to 0.9400 range to persist over the next 6 to 12 months. NZD/AUD hedging recommendations (generic) Exporter Source: Reuters 0-12 months = Exporters should ensure midpoints of policy at current market rates below 0.9200. We recommend having orders staggered lower to 0.9000 to be at maximums in the 0 to 12 month period. 12 24 months (no filter activation) = Exporters should be at midpoints of policy at 0.9100. Ensure half way between midpoints and maximums of policy with staggered orders starting from 0.9100 to 0.8900. 12+ months (filter test) = 3-year filter test activation requires spot of 0.8051. 2-year filter test activation requires spot of 0.8034. Importer 0-12 months = Should be well hedged following the recent spike to 0.9500. No new hedging is recommended at current market rates; use existing hedges and be patient for higher levels. 12+ months = 2 and 3 year filter tests not activated. Requires a spot rate of 0.9540. AUD/USD hedging recommendations (generic) Exporter 0-12 months = Contact us for specific recommendations. Importer 0-12 months = No new hedging at current market rates. Use existing hedges. Target 0.7600 for any necessary hedging requirements. Page 1 Strategy and tactics AUD report 10 July 2018

NZD/AUD CARR index CARR index (Central Assumptions Rate Reaction) Key variables, indicators and trends that drive NZD/AUD cross rate movements. Strong depreciation Moderate depreciation Neutral Moderate appreciation Strong appreciation Date: 10 July 2018 NZD/AUD spot rate: 0.9160 Relative variables Current position and outlook NZD/AUD impact (relative to today s spot rate) -3 to +3 1 mth 3 mths 12 mths 1 Monetary policy/inflation Both the Reserve Bank of New Zealand (RBNZ) and Reserve Bank of Australia (RBA) are on a similar monetary policy footing i.e. no hikes until next year (at the earliest). We expect relative short-term interest rates to remain steady. Higher interest rates contingent on stronger wage pressures and inflation, both of which are still relatively weak in both countries. 0 0 0 2 FX market open positions CFTC futures positioning has moved further net short for both NZD and AUD over recent weeks as trade fears weigh on both currencies. Since dropping sharply last week, momentum has since slowed and some profit taking is taking place. Should support modest AUD outperformance of NZD given relative positioning (already starting to occur). -1-1 0 3 Commodity prices Dairy prices weaker (but outlook still firm) and other NZ specific export commodity prices appear to have peaked. Stronger oil prices likely to continue supporting buying demand out of the Middle East. Iron ore prices have been slightly weaker, however now stable, though outlook lower over next 12 months. NZ/AU commodity price differential remains supportive of higher cross rate levels (i.e. ~0.9300+) +1 +1 +1 4 GDP growth Q1 NZ GDP at +2.7%yoy was broadly as expected but below Australia, which had a bumper 3.1%yoy print in Q1. Most material outperformance since 2012. RBA expect growth to average a little over 3% in 2018/19. NZ growth likely to remain below 3%, closer to 2.5%. No immediate currency impact given sustained support from commodity prices. 0-1 -1 5 Government fiscal balances NZ surpluses maintained within latest budget with restraint on new spending initiatives, however economic growth forecasts to derive tax revenue may be overly optimistic. Australian Treasury expect fiscal deficit to return to surplus by 2019/20 fiscal year, owing to stronger economic growth and an improved labour market outlook. Fiscal position strengthened since midyear outlook 0 0-1 6 Technical indicators Found support around 0.9140, however has failed to move above the next level of resistance at the 200-day moving average around 0.9200. The consolidation range (50-day moving average resistance and 200-day moving average support) has been squeezed and there is potential for the two moving averages to cross which would suggest short-term depreciation in the cross rate. -1-1 0 Average NZD/AUD impact -0.2-0.3-0.2 Page 2 Strategy and tactics AUD report 10 July 2018

NZD/AUD charts of the week The NZD/AUD cross rate has depreciated from 0.9270 to 0.9170 over the last fortnight as global trade tensions have eased somewhat in financial markets (even though the first round of tariffs were implemented between the US and China). The relatively stronger AUD is broadly consistent with Australia s stronger economic performance over the last quarter. Both Australian GDP growth and inflation (CPI) were tangibly higher than New Zealand s, with a relative outperformance of +0.4%yoy and +0.8%yoy respectively. Looking ahead, a relative underperformance of NZ inflation (Q2 CPI released 17 July) is a short-term downside risk for the NZD/AUD cross rate. With risk sentiment no longer weighing on the AUD, it climbed against the NZD returning to the consolidation range from early June (0.9150 to 0.9250). Having fallen sharply, the 50-day and 200-day moving averages are now generating regions of resistance for the cross rate, which it failed to breach earlier this week (at 0.9200, refer to chart below). As the 50-day and 200-day moving averages converge, it will be negative sign if they cross signifying a death cross and supporting further extension to the downside. Notwithstanding such technical indicators, we expect NZ CPI and the next Global Dairy Trade auction next week are more likely to drive price action on a more fundamental basis. Should these prove negative for the NZD, then a more pronounced movement lower is likely, based on the technical environment discussed above. New Zealand s relative strength in commodity markets could be under threat with dairy prices slipping over the last month. The GDT price index fell in all three of the last auctions, with a material fall of 5.0% recorded in the most recent (3 July) auction. Skim Milk Powder (SMP) prices are forecasted to remain soggy, with the potential to fall further, following India s announcement to export 60,000 metric tonnes of SMP over the next sixmonths. Despite the correlation between Whole Milk Powder (WMP) and SMP prices weakening over the previous two years, India s announcement still presents downside risk for WMP. If dairy prices remain soggy at next week s GDT auction, we d expect to see further downward pressure on the cross rate. However, iron ore prices have fared little better, slipping over the last fortnight to 58.49 USD/MT. In light of the above, we remain of the view that the NZD/AUD cross rate will trade across the page in the medium term, remaining within a 0.9000 to 0.9400 range, however potentially providing exporter hedging opportunities in the shorter term should recent trends continue. Page 3 Strategy and tactics AUD report 10 July 2018

NZD/AUD cross rate NZ-Aus relative commodity prices USD/MT 6000 WMP prices v SMP prices 5000 4000 3000 2000 1000 0 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Jan 18 Jul 18 Source: Bloomberg WMP SMP 1.0000 CBA NZ-AUS relative commodity price index and NZD/AUD cross rate 1.00 0.9750 0.95 0.90 0.9500 0.85 0.9250 0.80 0.9000 0.75 0.70 0.8750 0.65 0.8500 0.60 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 NZD/AUD Cross Rate NZ-AUS relative commodity prices Source: Bloomberg Page 4 Strategy and tactics AUD report 10 July 2018 Source: Bloomberg

NZD/AUD cross rate, 7-year rolling average and filter levels 1.0500 NZD/AUD cross rate, 7-year rolling average and filters 1.0000 0.9500 0.9000 0.8500 0.8000 0.7500 0.7000 0.6500 Jul 10 Jul 11 Jul 12 Jul 13 Jul 14 Jul 15 Jul 16 Jul 17 Jul 18 NZD/AUD cross rate 7-year rolling average filter - filter Source: Bloomberg Exporter Importer Current spot rate 0.9160 2 year 3 year 5 year 2 year 3 year 5 year Filter criteria below avg below avg below avg above avg above avg above avg Activated No No No No No No Necessary spot rate for activation 0.8034 0.8051 0.8075 0.9540 0.9540 0.9540 Page 5 Strategy and tactics AUD report 10 July 2018

AUD/USD CARR CARR index (Central Assumptions Rate Reaction) Key variables, indicators and trends that drive AUD/USD exchange rate movements. Strong depreciation Moderate depreciation Neutral Moderate appreciation Strong appreciation Date: 10 July 2018 AUD/USD spot rate: 0.7455 Relative variables Current position and outlook AUD/USD impact (relative to today s spot rate) -3 to +3 1 mth 3 mths 12 mths 1 Monetary policy/inflation RBA expected to remain on hold until next year. OCR unchanged at 1.50% since August 2016. Next move expected to be higher, not lower. Progress toward achieving inflation target of (2 3%, on average, over time) expected to be gradual. Requires acceleration in wage growth, which is currently stuck in the mud. US Federal Reserve have indicated 4 interest rate increases in total over 2018, and 3 in 2019. Interest rate differentials will continue to widen in favour of the U.S. for at least the next year. -2-2 +1 2 Government fiscal balances 3 GDP growth performance 4 Geopolitical risks/global investor sentiment 5 China and commodity prices 6 FX market open positions Australian Treasury expect fiscal deficit to return to surplus by 2019/20 fiscal year, owing to stronger economic growth and an improved labour market outlook. Fiscal position strengthened since mid-year outlook. Oppositely, the US fiscal deficit is expected to widen sharply over the next two years. Fiscal stimulus comes at a time when the economy is already running hot. Twin deficit in the US expected to continue widening which is not beneficial to the USD over the medium to long term. Australian growth outlook remains robust (contingent on US-China trade relations) with a bumper 3.10%yoy GDP print in Q1. Strong contributions from exports, inventories and government consumption. Low-level of interest rates, strong labour market conditions and high terms of trade to support economy. US tax reform to provide short-term boost to economic activity. Economic activity remains robust consistent with the Fed s hiking cycle. Nervousness in equity markets that global monetary policy becomes less loose (led by US) but earnings remain supportive. Trump twitter tirades and escalation of global trade frictions not helping. Global economic growth outlook softening (from recently higher levels). Risk may accelerate over second half 2018. Many geo-political and emerging market risks remain. Evidence of slowing within Chinese economic data including Industrial production growth and trade war concerns have been weighing on iron ore prices. With record port stocks of ores and the removal of steel restrictions over time, the outlook for iron ore over the next year is stable to lower. CFTC (i.e. speculative) net short positioning continued to increase over the past week, although some signs of profit taking beginning to emerge. Continued calm market environment likely to see more in the short term. +1 +1 +2 0 0 +1-1 -1 0 0 0-1 +1 +1 0 7 Technical indicators AUD/USD found support at 0.7310 with two failed attempts to break through this 18-month low. Now approaching the 50-day moving average, the next major level of resistance at 0.7500. Average AUD/USD impact +1 +1 0 0.0 0.0 +0.5 Page 6 Strategy and tactics AUD report 10 July 2018

AUD/USD exchange rate USD/CNY exchange rate AUD/USD chart of the week The AUD depreciated to a fresh 18-month low of 0.7310 last week, and has since bounced off to currently trade at 0.7455. The AUD s recovery is partially a result of the CNY beginning to stabilise from recent lows over the past week (referring to the chart below). As Australia s largest trading partner, the AUD is susceptible to risks arising from the Chinese economy and often gets hurt when FX speculators use the AUD as a proxy for CNY and China (it s a lot cheaper and easier to trade). 1.10 1.05 1.00 AUD/USD exchange rate and USD/CNY exchange rate 5.80 6.05 0.95 0.90 0.85 0.80 0.75 0.70 0.65 6.30 6.55 6.80 7.05 0.60 2013 2014 2015 2016 2017 2018 AUD/USD exchange rate USD/CNY exchange rate Source: Bloomberg As anticipated, the Reserve Bank of Australia (RBA) kept interest rates on hold at 1.50% at the July Monetary Policy Meeting. The RBA remains accommodative as global trade tensions remain a risk to the Australian economy, and consumer spending and inflation remain weak. The AUD saw little to no reaction following RBA s announcement. However, RBA Governor Lowe expressed that the outlook for the labour market remains positive, and although he sees wage growth remaining at low levels for some time he expects pressures to build, which will be an important signal that the economy is ready for an increase in interest rates. US economic data releases have been mixed over the past week. The US employment report saw an unexpected increase in the unemployment rate to 4.0% in May (from 3.8% in April), driven by an expanding labour force. Furthermore, wage growth remains subdued with average hourly earnings retracting to 2.7%yoy in June from 2.8%yoy in May. On the other hand, the Institute of Supply Management (ISM) manufacturing index saw growth in factory activity increasing from 58.7 points in May to 60.2 points in June. Strong manufacturing data despite recent tariffs of steel and aluminium support the view that US GDP will pick-up in Q2 from the disappointing Q1 figure of 2.0%. US CPI data released later this week is expect to print strong at 2.9%yoy despite the continued lack of wage pressure. Over the short-term we continue to see the AUD/USD exchange rate trading towards the bottom of the 0.7400 to 0.8000 range. As US growth and inflation momentum remains to the upside, the US Federal Reserve are widely expected to continue to raise interest rates over 2018/2019, while the RBA remain firmly on hold. Beyond the next six months, we see upside risks to the AUD/USD exchange rate, driven by the future expectation of RBA interest rate increases, the sharply-widening US fiscal deficit (negative for the USD), and assumed easing of trade tensions. Page 7 Strategy and tactics AUD report 10 July 2018

Get in touch Stuart Henderson Partner T: +64 9 425 0158 M:+64 21 343 423 E:stuart.r.henderson@nz.pwc.com Brett Johanson Partner T: +64 4 462 7234 M:+64 21 771 574 E: brett.a.johanson@nz.pwc.com Chris Hedley Director T: +64 9 355 8183 M: +64 21 479 680 E: chris.m.hedley@nz.pwc.com Alex Wondergem Director T: +64 9 355 8252 M: +64 21 041 2127 E:alex.j.wondergem@nz.pwc.com James Butler Treasury Advisor T: +64 9 355 8265 E: james.p.butler@nz.pwc.com James McHardy Consultant T: +64 9 355 8342 M: +64 21 263 4282 E: james.c.mchardy@nz.pwc.com Tom Lawson Associate Director T: +64 9 355 8144 M: +64 27 421 0733 E: tom.f.lawson@nz.pwc.com Tom North Treasury Advisor T: +64 9 355 8497 E: tom.o.north@nz.pwc.com Sarah Houston Eastergaard Manager T:+64 4 462 7310 E:sarah.j.houston.estergaaard@nz.pwc.com Matt Stewart Treasury Analyst T:+64 4 462 7037 E:matt.j.stewart@nz.pwc.com Ollie McDowell Treasury Advisor T:+64 9 355 8702 E:ollie.a.mcdowell@nz.pwc.com Georgia Bowers Treasury Analyst T:+64 9 355 8760 E:georgia.r.bowers@nz.pwc.com Rajeev Verma Treasury Analyst T:+64 9 355 8648 E: rajeev.c.verma@nz.pwc.com pwc.co.nz /corporate-treasury-advisory-services/ DISCLAIMER: This report is for PwC retained treasury clients and is subject to the individual agreed engagement letter and the following restrictions. This report should not be reproduced or supplied to any other party without first obtaining our (PwC New Zealand) written consent. We accept no responsibility for any reliance that may be placed on our report should it be used for any purpose other than that set out below and in any event we will accept no liability to any party other than you in respect of its contents. The purpose of the report is to document our current financial market views and generic hedging recommendations. The statements and opinions contained in this report are based on data obtained from the financial markets and are so contained in good faith and in the belief that such statements, opinions and data are not false or misleading. In preparing this report, we have relied upon information which we believe to be reliable and accurate. We reserve the right (but will be under no obligation) to review our assessment and if we consider it necessary, to revise our opinion in the light of any information existing at the date of this report which becomes known to us after that date. This report must be read in its entirety. Individual sections of this report could be misleading if considered in isolation from each other.