NZD USD - FUNDAMENTAL DRIVERS
NZD
FUNDAMENTAL BIAS: WEAK BULLISH
1. Monetary Policy
More hawkish than expected can sum up the February RBNZ policy decision. Even though the bank delivered a 25bsp hike and did not surprise with a 50bsp hike (probability was at 30% before the meeting), they managed to surprise markets with their upgraded projections and plans for QT. Markets were anticipating the bank to take a passive QT route by ceasing reinvestments, but instead announced that they will start to sell their bond holdings from July. Furthermore, markets were looking for the bank to upgrade their OCR terminal rate projection to between 2.8%-3.0% from 2.6% but instead increased it 3.4%, essentially adding another 3 hikes to their forecasts for the current hiking cycle. With the latest decision the RBNZ has once again showed that it’s the most hawkish central bank among the majors. However, price action will tell whether it’s been enough to finally see the markets giving the NZD the upside it deserves.
2. Economic and health developments
The economic outlook looks solid for New Zealand, with growth expected to accelerate, inflation expected to stay high, home prices still close to 30%, commodity prices doing well, and now also a ratified trade deal with China that is expected to open up more Chinese markets for New Zealand goods.
3. Global Risk Outlook
As a high-beta currency, the NZD usually benefits from overall positive risk sentiment as well as environments that benefit pro-cyclical assets. Thus, both short-term (immediate) and med-term (underlying) risk sentiment will always be a key consideration for the NZD.
4. CFTC Analysis
Positioning changes has been very limited for the NZD in the past few weeks with major market participants all still holding onto net-short positions but roughly in the middle of the pack across all three. For now, positioning isn’t giving us many signals as to whether the next leg is more likely to be higher or lower for the NZD.
USD
FUNDAMENTAL BIAS: BULLISH
1. Monetary Policy
The Jan FOMC decision was hawkish on multiple fronts. The statement signalled a March hike as expected, but Chair Powell portrayed a very hawkish tone. Even though Powell said they can’t predict the rate path with certainty, he stressed the economy is in much better shape compared to the 2015 cycle and that will have implications for the pace of hikes (more and faster). Furthermore, he explained that there is ‘quite a bit of room’ to raise rates without damaging employment, which suggests upside risks to the rate path. A big question going into the meeting was how concerned the Fed was about recent equity market volatility . But the Chair explained that markets and financial conditions are reflecting policy changes in advance and that in aggregate the measures they look at isn’t showing red lights. Thus, any ‘Fed Put’ is much further away and inflation is the Fed’s biggest concern right now. The Chair also didn’t rule out the possibility of a 50bsp hike in March or possibly hiking at every meeting this year, which was hawkish as it means the Fed wants optionality to move more aggressive if they need to. We didn’t get new info on the balance sheet and Powell reiterated that they’re contemplating a start of QT after hiking has begun and they’ll discuss this in coming meetings. Overall, the tone and language were a lot more hawkish than the Dec meeting and more hawkish than consensus was expecting.
2. Global & Domestic Economy
As the reserve currency, the USD’s global usage means it’s usually inversely correlated to the global economy and global trade. The USD usually appreciates when growth & inflation slow (disinflation) and depreciates when growth & inflation accelerates (reflation). Thus, current expectations of a cyclical slowdown (and possible stagflation) are good for the Dollar. Incoming data will be watched in relation to the ‘Fed Put’ as there are many similarities between now and 4Q18, where the Fed were also tightening into a slowdown. If growth data slows and the Fed stays hawkish it’s a positive for the USD, once the Fed pivots dovish that’ll be a negative for the USD.
3. CFTC Analysis
The USD remains a net-long across major participants, but with price action looking stretched and with peak hawkishness for the Fed arguably close with >6 hikes priced, the risk to reward of chasing USD strength is not very attractive right now. Continued stagflation and geopolitical risks it mean that stretched positioning might not be as important as usual. JP Morgan also shared some stats that suggest the USD has a historical tendency to strengthen in the 6 months going into a first hike but then to weaken during the 6 months directly after a first hike. This is an interesting phenomenon which is worth keeping in mind given the USD’s recent performance.
FUNDAMENTAL BIAS: WEAK BULLISH
1. Monetary Policy
More hawkish than expected can sum up the February RBNZ policy decision. Even though the bank delivered a 25bsp hike and did not surprise with a 50bsp hike (probability was at 30% before the meeting), they managed to surprise markets with their upgraded projections and plans for QT. Markets were anticipating the bank to take a passive QT route by ceasing reinvestments, but instead announced that they will start to sell their bond holdings from July. Furthermore, markets were looking for the bank to upgrade their OCR terminal rate projection to between 2.8%-3.0% from 2.6% but instead increased it 3.4%, essentially adding another 3 hikes to their forecasts for the current hiking cycle. With the latest decision the RBNZ has once again showed that it’s the most hawkish central bank among the majors. However, price action will tell whether it’s been enough to finally see the markets giving the NZD the upside it deserves.
2. Economic and health developments
The economic outlook looks solid for New Zealand, with growth expected to accelerate, inflation expected to stay high, home prices still close to 30%, commodity prices doing well, and now also a ratified trade deal with China that is expected to open up more Chinese markets for New Zealand goods.
3. Global Risk Outlook
As a high-beta currency, the NZD usually benefits from overall positive risk sentiment as well as environments that benefit pro-cyclical assets. Thus, both short-term (immediate) and med-term (underlying) risk sentiment will always be a key consideration for the NZD.
4. CFTC Analysis
Positioning changes has been very limited for the NZD in the past few weeks with major market participants all still holding onto net-short positions but roughly in the middle of the pack across all three. For now, positioning isn’t giving us many signals as to whether the next leg is more likely to be higher or lower for the NZD.
USD
FUNDAMENTAL BIAS: BULLISH
1. Monetary Policy
The Jan FOMC decision was hawkish on multiple fronts. The statement signalled a March hike as expected, but Chair Powell portrayed a very hawkish tone. Even though Powell said they can’t predict the rate path with certainty, he stressed the economy is in much better shape compared to the 2015 cycle and that will have implications for the pace of hikes (more and faster). Furthermore, he explained that there is ‘quite a bit of room’ to raise rates without damaging employment, which suggests upside risks to the rate path. A big question going into the meeting was how concerned the Fed was about recent equity market volatility . But the Chair explained that markets and financial conditions are reflecting policy changes in advance and that in aggregate the measures they look at isn’t showing red lights. Thus, any ‘Fed Put’ is much further away and inflation is the Fed’s biggest concern right now. The Chair also didn’t rule out the possibility of a 50bsp hike in March or possibly hiking at every meeting this year, which was hawkish as it means the Fed wants optionality to move more aggressive if they need to. We didn’t get new info on the balance sheet and Powell reiterated that they’re contemplating a start of QT after hiking has begun and they’ll discuss this in coming meetings. Overall, the tone and language were a lot more hawkish than the Dec meeting and more hawkish than consensus was expecting.
2. Global & Domestic Economy
As the reserve currency, the USD’s global usage means it’s usually inversely correlated to the global economy and global trade. The USD usually appreciates when growth & inflation slow (disinflation) and depreciates when growth & inflation accelerates (reflation). Thus, current expectations of a cyclical slowdown (and possible stagflation) are good for the Dollar. Incoming data will be watched in relation to the ‘Fed Put’ as there are many similarities between now and 4Q18, where the Fed were also tightening into a slowdown. If growth data slows and the Fed stays hawkish it’s a positive for the USD, once the Fed pivots dovish that’ll be a negative for the USD.
3. CFTC Analysis
The USD remains a net-long across major participants, but with price action looking stretched and with peak hawkishness for the Fed arguably close with >6 hikes priced, the risk to reward of chasing USD strength is not very attractive right now. Continued stagflation and geopolitical risks it mean that stretched positioning might not be as important as usual. JP Morgan also shared some stats that suggest the USD has a historical tendency to strengthen in the 6 months going into a first hike but then to weaken during the 6 months directly after a first hike. This is an interesting phenomenon which is worth keeping in mind given the USD’s recent performance.
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