NZD JPY - FUNDAMENTAL DRIVERS
NZD
FUNDAMENTAL BIAS: BULLISH
1. The Monetary Policy outlook for the RBNZ
New Zealand’s Zero Covid strategy caused quite the rigmarole for the NZD before the RBNZ’s last meeting as market participants were forced to unwind aggressive expectations for rate hikes going into the meeting. The unwind was so aggressive that OIS prices dropped from a 100% chance of a hike at that meeting to just above 50% going into it. The RBNZ surprised by leaving rates unchanged, but offered an optimistic ton compared to their prior meetings. They projected 7 hikes between Q4 2021 and H1 2023 (bringing the OCR to 2.0%). This was much more aggressive than what markets were expecting. Governor Orr later explained that they cannot wait for uncertainty to move on policy as they have a lot of work to do to get back to the neutral rate of 2.0%. When asked about Oct, the Governor said the meeting is live. Thus, with the upgraded rate path the med-term bullish outlook remains intact for the NZD. A week after their meeting we also had very hawkish comments from RBNZ’s Hawkesby who stated that the bank’s decision not to hike rates was mostly about optics and not due to risks, and also explained that the bank contemplated hiking rates by 50 basis points. This just confirmed the bank’s hawkish pivot and places them miles ahead any
other major central banks. The announcement two weeks ago about the RBNZ moving forward with tightening LVR restrictions to curb speculation in the housing market was interesting from a timing point of view. Usually, these type of macroprudential policies takes pressure of the central bank to reign in speculation with higher rates. The announcement has already seen some repricing for October with markets now pricing in a 25-basis point hike instead of a 50-basis point hike for this week’s upcoming meeting on Wednesday.
2. Developments surrounding the global risk outlook.
As a high-beta currency, the NZD benefited from the market's improving risk outlook coming out of the pandemic as participants moved out of safe-havens. As a pro-cyclical currency, the AUD enjoyed upside alongside other cyclical assets supported by reflation and post-recession recovery best. If expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the AUD in the med-term , but recent short-term jitters are a timely reminder that risk sentiment is also a very important short-term driver.
3. The country’s economic and health developments
So far, the virus situation in New Zealand has been a flash in the pan worry. The government has been able to trace the source of the recent outbreak and should be able to keep the situation under control. Any further escalation though will be important to watch.
4. CFTC Analysis
Latest CFTC data showed a positioning change of +2144 with a net non-commercial position of +10246. This week saw some decent unwind in net-long positions for leveraged funds (fast money) which can also explain some of the oversized downside in the NZD during the past week. With the overall optimistic rate path from the RBNZ, the bias for the currency remains unchanged, and with small net-long positioning the current spot levels for the NZD still looks attractive for med-term buyers but waiting for the RBNZ is a prudent move.
JPY
FUNDAMENTAL BIAS: BEARISH
1. Safe-haven status and overall risk outlook
As a safe-haven currency, the market's risk outlook is the primary driver of JPY. Economic data rarely proves market moving; and although monetary policy expectations can prove highly market-moving in the short-term, safe-haven flows are typically the more dominant factor. The market's overall risk tone has improved considerably following the pandemic with good news about successful vaccinations, and ongoing monetary and fiscal policy support paved the way for markets to expect a robust global economic recovery. Of course, there remains many uncertainties and many countries are continuing to fight virus waves, but as a whole the outlook has kept on improving over the past couple of months, which would expect safe-haven demand to diminish and result in a bearish outlook for the JPY.
2. Low-yielding currency with inverse correlation to US10Y
As a low yielding currency, the JPY usually shares an inverse correlation to strong moves in yield differentials, more specifically in strong moves in US10Y. However, like most correlations, the strength of the inverse correlation between the JPY and US10Y is not perfect and will ebb and flow depending on the type of market environment from a risk and cycle point of view. The rangebound price action in US10Y from July saw our conviction for more upside in USDJPY take a knock, and we have been waiting for US10Y to make a more sustainable break before we look to add longs in USDJPY. This week, we finally saw US10Y being able to clear the key 1.38% level that has acted as strong resistance since July. Thus, as long as US10Y manages to stay above 1.38% we would look for pull backs in USDJPY to look for med-term buy opportunities. However, since 1.38% was such a key level, any break and close below 1.38% for the US10Y would be an automatic trigger to reduce any exposure.
3. CFTC Analysis
Latest CFTC data showed a positioning change of -8689 with a net non-commercial position of -64760. The past few days of price action in the JPY was mostly driven by the excessive moves we saw in yields on the US side, with US10Y climbing 20 basis points (that’s a lot for the bond market by the way) in a very short space of time. The inverse correlation to US10Y saw massive downside versus the USD at the start of the week, and then as yields cooled off and risk sentiment started to sour towards the end of the week, we saw some mild reprieve coming back for the JPY. For now, the bias remains firmly titled to the downside in the med-term, but as always, any major risk off flows can support the JPY, especially with quite a sizable net-short position still built up in the currency. It’s not only large speculators but also leveraged funds that are net-short the JPY, so expect any major risk off flows to favour the JPY, unless that risk off flow is driven by strong moves higher in US10Y of course so just keep that in mind.
FUNDAMENTAL BIAS: BULLISH
1. The Monetary Policy outlook for the RBNZ
New Zealand’s Zero Covid strategy caused quite the rigmarole for the NZD before the RBNZ’s last meeting as market participants were forced to unwind aggressive expectations for rate hikes going into the meeting. The unwind was so aggressive that OIS prices dropped from a 100% chance of a hike at that meeting to just above 50% going into it. The RBNZ surprised by leaving rates unchanged, but offered an optimistic ton compared to their prior meetings. They projected 7 hikes between Q4 2021 and H1 2023 (bringing the OCR to 2.0%). This was much more aggressive than what markets were expecting. Governor Orr later explained that they cannot wait for uncertainty to move on policy as they have a lot of work to do to get back to the neutral rate of 2.0%. When asked about Oct, the Governor said the meeting is live. Thus, with the upgraded rate path the med-term bullish outlook remains intact for the NZD. A week after their meeting we also had very hawkish comments from RBNZ’s Hawkesby who stated that the bank’s decision not to hike rates was mostly about optics and not due to risks, and also explained that the bank contemplated hiking rates by 50 basis points. This just confirmed the bank’s hawkish pivot and places them miles ahead any
other major central banks. The announcement two weeks ago about the RBNZ moving forward with tightening LVR restrictions to curb speculation in the housing market was interesting from a timing point of view. Usually, these type of macroprudential policies takes pressure of the central bank to reign in speculation with higher rates. The announcement has already seen some repricing for October with markets now pricing in a 25-basis point hike instead of a 50-basis point hike for this week’s upcoming meeting on Wednesday.
2. Developments surrounding the global risk outlook.
As a high-beta currency, the NZD benefited from the market's improving risk outlook coming out of the pandemic as participants moved out of safe-havens. As a pro-cyclical currency, the AUD enjoyed upside alongside other cyclical assets supported by reflation and post-recession recovery best. If expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the AUD in the med-term , but recent short-term jitters are a timely reminder that risk sentiment is also a very important short-term driver.
3. The country’s economic and health developments
So far, the virus situation in New Zealand has been a flash in the pan worry. The government has been able to trace the source of the recent outbreak and should be able to keep the situation under control. Any further escalation though will be important to watch.
4. CFTC Analysis
Latest CFTC data showed a positioning change of +2144 with a net non-commercial position of +10246. This week saw some decent unwind in net-long positions for leveraged funds (fast money) which can also explain some of the oversized downside in the NZD during the past week. With the overall optimistic rate path from the RBNZ, the bias for the currency remains unchanged, and with small net-long positioning the current spot levels for the NZD still looks attractive for med-term buyers but waiting for the RBNZ is a prudent move.
JPY
FUNDAMENTAL BIAS: BEARISH
1. Safe-haven status and overall risk outlook
As a safe-haven currency, the market's risk outlook is the primary driver of JPY. Economic data rarely proves market moving; and although monetary policy expectations can prove highly market-moving in the short-term, safe-haven flows are typically the more dominant factor. The market's overall risk tone has improved considerably following the pandemic with good news about successful vaccinations, and ongoing monetary and fiscal policy support paved the way for markets to expect a robust global economic recovery. Of course, there remains many uncertainties and many countries are continuing to fight virus waves, but as a whole the outlook has kept on improving over the past couple of months, which would expect safe-haven demand to diminish and result in a bearish outlook for the JPY.
2. Low-yielding currency with inverse correlation to US10Y
As a low yielding currency, the JPY usually shares an inverse correlation to strong moves in yield differentials, more specifically in strong moves in US10Y. However, like most correlations, the strength of the inverse correlation between the JPY and US10Y is not perfect and will ebb and flow depending on the type of market environment from a risk and cycle point of view. The rangebound price action in US10Y from July saw our conviction for more upside in USDJPY take a knock, and we have been waiting for US10Y to make a more sustainable break before we look to add longs in USDJPY. This week, we finally saw US10Y being able to clear the key 1.38% level that has acted as strong resistance since July. Thus, as long as US10Y manages to stay above 1.38% we would look for pull backs in USDJPY to look for med-term buy opportunities. However, since 1.38% was such a key level, any break and close below 1.38% for the US10Y would be an automatic trigger to reduce any exposure.
3. CFTC Analysis
Latest CFTC data showed a positioning change of -8689 with a net non-commercial position of -64760. The past few days of price action in the JPY was mostly driven by the excessive moves we saw in yields on the US side, with US10Y climbing 20 basis points (that’s a lot for the bond market by the way) in a very short space of time. The inverse correlation to US10Y saw massive downside versus the USD at the start of the week, and then as yields cooled off and risk sentiment started to sour towards the end of the week, we saw some mild reprieve coming back for the JPY. For now, the bias remains firmly titled to the downside in the med-term, but as always, any major risk off flows can support the JPY, especially with quite a sizable net-short position still built up in the currency. It’s not only large speculators but also leveraged funds that are net-short the JPY, so expect any major risk off flows to favour the JPY, unless that risk off flow is driven by strong moves higher in US10Y of course so just keep that in mind.
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