NZD USD - 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 this week as market participants were forced to unwind some of their very 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 to just above 50% at some stage. The RBNZ chose to leave rates unchanged, but despite the virus escalation they offered a much more optimistic tone compared to their prior meeting by updating their rate path projections to show 7 projected hikes between Dec 2021 and H1 2023 (bringing the OCR to 2.0%). This was even more aggressive than the already aggressive bets heading into the meeting before the covid news hit the wires. The Governor also later explained that they need to continue to move on policy and cannot wait for uncertainty as they have a lot of work to do to get back to the neutral rate of 2.0%. Also, when asked about Oct Governor Orr said the meeting is live, but also acknowledged that they’ve made it very clear their next move is likely a hike so they can afford to wait. Thus, with the upgraded rate path the med-term bullish outlook remains intact for the NZD. Last week we saw very hawkish comments from RBNZ’s Hawkesby who stated that the bank’s decision not to hike rates last week was mostly to do with optics and not due to perceived risks, and also explained that the bank contemplated hiking rates by 50 basis points, confirming the bank’s hawkish tone and placing the RBNZ once again miles ahead of any other
major central banks in terms of policy normalization and tightening. This week’s announcement about the bank moving forward with proposed tightening of LVR restrictions to curb speculation in the housing market. Usually, these type of macroprudential policies takes pressure of the central bank to reign in speculation with higher rates. The change has already seen some repricing of an October hike so pay attention to any further push back in hike expectations for October.
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 +1896 with a net non-commercial position of +8102. With the overall optimistic rate path from the RBNZ, the bias for the currency remains unchanged, and with a small net-long positioning the current spot levels for the NZD still looks attractive for med-term buyers, especially after the push lower with recent risk off sentiment.
USD
FUNDAMENTAL BIAS: NEUTRAL
1. The global risk outlook.
Global economic data continues to surprise lower and should continue to struggle to surprise to the upside after the pandemic rebound. As the USD usually moves inversely to global growth that should be supportive for the USD as long as the global growth data moves lower.
2. The Monetary Policy outlook for the FED
More hawkish than was expected is a good way to sum up last week’s meeting. The FOMC gave the go ahead for market expectations of a November tapering announcement by saying that if progress on the economic goals continues as expected they would deem their criteria for substantial further progress being met, also saying the statement language was meant to flag that the bar for tapering could be met at the next meeting (Nov). Apart from that, inflation was seen treading above the Fed’s 2% Core PCE target until 2024, which was arguably also more hawkish. On the labour market side, Fed Chair Powell explained that he thought the substantial further progress threshold for the labour market was ‘all but met’, and also explained that it won’t necessarily take a very strong September jobs print for them to start tapering and that just a ‘decent’ print will do. Even though the 2022 just narrowly projected a hike for 2022 and still close to the June median, the rate path was much steeper than markets were anticipating with seven hikes expected over the forecast horizon (from just two previously). All in all, this was more hawkish than expected, but didn’t really see any meaningful follow through in the USD. A faster tapering was a key factor we were watching for an incrementally bullish tilt in the outlook, but at face value markets were surprisingly quick to discount it. The muted reaction
could have been down to positioning with the DXY already close to YTD highs, or it might have been the fact that the Fed isn’t the only game in town right now when it comes to policy normalization (RBNZ, BoE, BoC ). Either way, the muted reaction means we are staying patient with our med-term outlook for the USD right now.
3. Real Yields
Despite recent divergence between the USD and US real yields, we still think further downside in real yields will be a struggle so close to new cycle lows and that the probability is skewed higher given the outlook for growth, inflation and tapering and should be supportive for the USD.
4. Economic Data
Very light economic data in the week ahead with the ISM Mfg PMI being the only highlight. Even though this print is always important, the fact that the Fed has already hinted at a faster taper even without seeing Sep data means there is more downside risks to incoming data compared to upside risks, as upside risks will confirm the Fed’s decision while enough downside surprises might cause some doubts.
4. CFTC Analysis
Latest CFTC data showed a positioning change of +827 with a net non-commercial position of +25100. For now, with the fundamental outlook still neutral, and with positioning at current levels the incoming data will remain the key driver for the USD’s short-term volatility . With a fairly light economic schedule in the week ahead (apart from ISM Mfg PMI on Friday) we might have a more risk driven Dollar drive this week.
FUNDAMENTAL BIAS: BULLISH
1. The Monetary Policy outlook for the RBNZ
New Zealand’s Zero Covid strategy caused quite the rigmarole for the NZD this week as market participants were forced to unwind some of their very 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 to just above 50% at some stage. The RBNZ chose to leave rates unchanged, but despite the virus escalation they offered a much more optimistic tone compared to their prior meeting by updating their rate path projections to show 7 projected hikes between Dec 2021 and H1 2023 (bringing the OCR to 2.0%). This was even more aggressive than the already aggressive bets heading into the meeting before the covid news hit the wires. The Governor also later explained that they need to continue to move on policy and cannot wait for uncertainty as they have a lot of work to do to get back to the neutral rate of 2.0%. Also, when asked about Oct Governor Orr said the meeting is live, but also acknowledged that they’ve made it very clear their next move is likely a hike so they can afford to wait. Thus, with the upgraded rate path the med-term bullish outlook remains intact for the NZD. Last week we saw very hawkish comments from RBNZ’s Hawkesby who stated that the bank’s decision not to hike rates last week was mostly to do with optics and not due to perceived risks, and also explained that the bank contemplated hiking rates by 50 basis points, confirming the bank’s hawkish tone and placing the RBNZ once again miles ahead of any other
major central banks in terms of policy normalization and tightening. This week’s announcement about the bank moving forward with proposed tightening of LVR restrictions to curb speculation in the housing market. Usually, these type of macroprudential policies takes pressure of the central bank to reign in speculation with higher rates. The change has already seen some repricing of an October hike so pay attention to any further push back in hike expectations for October.
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 +1896 with a net non-commercial position of +8102. With the overall optimistic rate path from the RBNZ, the bias for the currency remains unchanged, and with a small net-long positioning the current spot levels for the NZD still looks attractive for med-term buyers, especially after the push lower with recent risk off sentiment.
USD
FUNDAMENTAL BIAS: NEUTRAL
1. The global risk outlook.
Global economic data continues to surprise lower and should continue to struggle to surprise to the upside after the pandemic rebound. As the USD usually moves inversely to global growth that should be supportive for the USD as long as the global growth data moves lower.
2. The Monetary Policy outlook for the FED
More hawkish than was expected is a good way to sum up last week’s meeting. The FOMC gave the go ahead for market expectations of a November tapering announcement by saying that if progress on the economic goals continues as expected they would deem their criteria for substantial further progress being met, also saying the statement language was meant to flag that the bar for tapering could be met at the next meeting (Nov). Apart from that, inflation was seen treading above the Fed’s 2% Core PCE target until 2024, which was arguably also more hawkish. On the labour market side, Fed Chair Powell explained that he thought the substantial further progress threshold for the labour market was ‘all but met’, and also explained that it won’t necessarily take a very strong September jobs print for them to start tapering and that just a ‘decent’ print will do. Even though the 2022 just narrowly projected a hike for 2022 and still close to the June median, the rate path was much steeper than markets were anticipating with seven hikes expected over the forecast horizon (from just two previously). All in all, this was more hawkish than expected, but didn’t really see any meaningful follow through in the USD. A faster tapering was a key factor we were watching for an incrementally bullish tilt in the outlook, but at face value markets were surprisingly quick to discount it. The muted reaction
could have been down to positioning with the DXY already close to YTD highs, or it might have been the fact that the Fed isn’t the only game in town right now when it comes to policy normalization (RBNZ, BoE, BoC ). Either way, the muted reaction means we are staying patient with our med-term outlook for the USD right now.
3. Real Yields
Despite recent divergence between the USD and US real yields, we still think further downside in real yields will be a struggle so close to new cycle lows and that the probability is skewed higher given the outlook for growth, inflation and tapering and should be supportive for the USD.
4. Economic Data
Very light economic data in the week ahead with the ISM Mfg PMI being the only highlight. Even though this print is always important, the fact that the Fed has already hinted at a faster taper even without seeing Sep data means there is more downside risks to incoming data compared to upside risks, as upside risks will confirm the Fed’s decision while enough downside surprises might cause some doubts.
4. CFTC Analysis
Latest CFTC data showed a positioning change of +827 with a net non-commercial position of +25100. For now, with the fundamental outlook still neutral, and with positioning at current levels the incoming data will remain the key driver for the USD’s short-term volatility . With a fairly light economic schedule in the week ahead (apart from ISM Mfg PMI on Friday) we might have a more risk driven Dollar drive this week.
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