NZD USD - FUNDAMENTAL DRIVERS
NZD
FUNDAMENTAL BIAS: BULLISH
1. The Monetary Policy outlook for the RBNZ
At their Oct meeting, the RBNZ delivered on expectations to raise the OCR to 0.50%. As the hike was already fully priced, the lack of new hawkish tones we saw a textbook buy-the-rumour-sell-the-fact reaction in the NZD pushing lower. There was additional focus on the RBNZ expecting headline CPI to climb above 4 percent in the near term, but the most important part of the statement was the subsequent comment that the bank still sees CPI returning towards the 2 percent midpoint over the medium term and that ‘the current COVID-19-related restrictions have not materially changed the medium-term outlook for inflation and employment since the August Statement’. Thus, despite recent covid concerns, inflation concerns and energy concerns, that part of the statement acknowledged that nothing has changed in terms of the bank’s OCR projections released at the August meeting. Unsurprisingly, the bank also stated that their future rate path is contingent on the medium-term outlook for inflation and employment, which means keeping close tabs on incoming data and the virus situation will remain a key focus for us in the weeks and months ahead. With the bank now being the first to hike rates among the major central banks and sitting on the highest cash rate among the majors, and with an OCR projection that is still head and shoulders above the rest, the bias for the NZD remains firmly titled to the upside, and as rates keeps rising, the currency’s carry attractiveness will be a key focus point for the NZD in the months ahead.
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 NZD 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 NZD 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. Economic and health developments
Virus cases can still have an impact on NZD sentiment, which means the fact that NZ virus cases is at record high levels is something to pay attention to. For now, it’s had very limited impact on the NZD due to the NZ government abandoning their covid-zero strategy and since virus risks have been downplayed by the RBNZ, but further escalation leading to more lockdowns will be important to keep on the radar.
4. CFTC Analysis
Latest CFTC data showed a positioning change of +4955 with a net non-commercial position of +13861. The NZD reflects net-long positioning for both large speculators as well as leveraged funds but are nowhere near stress levels right now. With the NZD now sitting on the highest cash rate among the major economies and with expectations of that to continue to rise we think carry attractiveness will become a key focus point for the NZD in the months ahead and should mean a favourable upside bias for the NZD against the low yielders like JPY and CHF. In the shortterm though, as we mentioned above, the virus situation could see some of the recent upside given back, and also keep overall risk sentiment in mind which saw the NZD failing to benefit from the stellar quarterly jobs data released last week
USD
FUNDAMENTAL BIAS: WEAK BULLISH
1. The Monetary Policy outlook for the FED
Another bank that was hawkish in deed by dovish in word in their Nov policy decision. The Fed official announced tapering as expected, with purchases said to be reduced this month at a pace of 10bln in Treasuries and 5bln in MBS per month and explained that a mid-2022 conclusion is still their base case. There were also some hawkish language changes about inflation, with the bank dropping previous comments that called inflation transitory and replacing it with ‘expected to be transitory’, basically leaving some optionality to pivot more aggressively with tapering should price pressures stay sticky for too long. However, Fed Chair Powell did a really good job to put on a familiar dovish front by explaining that they see the current price pressures as driven by supply bottlenecks and still see those pressures cooling down in in 1H22, essentially giving themselves half a year of ‘tolerating’ the current inflation overshoot. Apart from that, Chair Powell explained that they would need to see maximum employment before their conditions for a lift off in rates would be met, and also explained that its likely that full employment could be reached by mid-2022. That endorsed the idea that a 2h22 hike is possible, but the Chair refused to provide any idea of what maximum employment would look like. On the rate front, Powell also explained that they think they can be patient with rates right now as they want more time to see in what shape the economy is in after the current covid shocks have calmed and after bottlenecks have eased.
Overall, a policy meeting that was hawkish in their actions but dovish in their words.
2. Real Yields
With a Q4 taper start and mid-2022 taper conclusion on the card, we think further downside in real yields will be a struggle and the probability are skewed higher given the outlook for growth, inflation and policy, and higher real yields should be supportive for the USD in the med-term.
3. The global risk outlook
One supporting factor for the USD from June was the onset of downside surprises in global growth. However, there has been a growing chorus of market participants looking for a possible bounce in growth data in Q4 after the covid and supply chain related slowdown in Q3. If we do indeed see a pickup in growth, while inflation is still elevated, that would mean a reflationary environment, which is usually a negative input for the Dollar, so we want to keep that in mind when assessing the incoming US economic data in the next few weeks.
4. Economic Data
With the FOMC in the mix, the other economic data points largely took a back seat this past week, with even NFP not really creating a lot of meaningful or sustainable volatility. We did however see a late session sell-off in the Dollar, which was arguably more driven by technical factors as the Dollar topped out at key technical resistance and could also have been some profit taking after the recent push higher. This upcoming week’s main economic event will be Oct CPI and will be an event worth keeping on the radar after this past week’s FOMC.
5. CFTC Analysis
Latest CFTC data showed a positioning change of +525 with a net non-commercial position of +34982. Positioning isn’t anywhere near stress levels for the USD, but the speed of the build-up in large specular positioning has been sizeable on a 1-year look back period. Thus, even though the med-term bias remains unchanged, it does mean the USD could be sensitive to mean reversion risks just like we saw on Friday while we are still trading close to YTD highs.
FUNDAMENTAL BIAS: BULLISH
1. The Monetary Policy outlook for the RBNZ
At their Oct meeting, the RBNZ delivered on expectations to raise the OCR to 0.50%. As the hike was already fully priced, the lack of new hawkish tones we saw a textbook buy-the-rumour-sell-the-fact reaction in the NZD pushing lower. There was additional focus on the RBNZ expecting headline CPI to climb above 4 percent in the near term, but the most important part of the statement was the subsequent comment that the bank still sees CPI returning towards the 2 percent midpoint over the medium term and that ‘the current COVID-19-related restrictions have not materially changed the medium-term outlook for inflation and employment since the August Statement’. Thus, despite recent covid concerns, inflation concerns and energy concerns, that part of the statement acknowledged that nothing has changed in terms of the bank’s OCR projections released at the August meeting. Unsurprisingly, the bank also stated that their future rate path is contingent on the medium-term outlook for inflation and employment, which means keeping close tabs on incoming data and the virus situation will remain a key focus for us in the weeks and months ahead. With the bank now being the first to hike rates among the major central banks and sitting on the highest cash rate among the majors, and with an OCR projection that is still head and shoulders above the rest, the bias for the NZD remains firmly titled to the upside, and as rates keeps rising, the currency’s carry attractiveness will be a key focus point for the NZD in the months ahead.
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 NZD 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 NZD 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. Economic and health developments
Virus cases can still have an impact on NZD sentiment, which means the fact that NZ virus cases is at record high levels is something to pay attention to. For now, it’s had very limited impact on the NZD due to the NZ government abandoning their covid-zero strategy and since virus risks have been downplayed by the RBNZ, but further escalation leading to more lockdowns will be important to keep on the radar.
4. CFTC Analysis
Latest CFTC data showed a positioning change of +4955 with a net non-commercial position of +13861. The NZD reflects net-long positioning for both large speculators as well as leveraged funds but are nowhere near stress levels right now. With the NZD now sitting on the highest cash rate among the major economies and with expectations of that to continue to rise we think carry attractiveness will become a key focus point for the NZD in the months ahead and should mean a favourable upside bias for the NZD against the low yielders like JPY and CHF. In the shortterm though, as we mentioned above, the virus situation could see some of the recent upside given back, and also keep overall risk sentiment in mind which saw the NZD failing to benefit from the stellar quarterly jobs data released last week
USD
FUNDAMENTAL BIAS: WEAK BULLISH
1. The Monetary Policy outlook for the FED
Another bank that was hawkish in deed by dovish in word in their Nov policy decision. The Fed official announced tapering as expected, with purchases said to be reduced this month at a pace of 10bln in Treasuries and 5bln in MBS per month and explained that a mid-2022 conclusion is still their base case. There were also some hawkish language changes about inflation, with the bank dropping previous comments that called inflation transitory and replacing it with ‘expected to be transitory’, basically leaving some optionality to pivot more aggressively with tapering should price pressures stay sticky for too long. However, Fed Chair Powell did a really good job to put on a familiar dovish front by explaining that they see the current price pressures as driven by supply bottlenecks and still see those pressures cooling down in in 1H22, essentially giving themselves half a year of ‘tolerating’ the current inflation overshoot. Apart from that, Chair Powell explained that they would need to see maximum employment before their conditions for a lift off in rates would be met, and also explained that its likely that full employment could be reached by mid-2022. That endorsed the idea that a 2h22 hike is possible, but the Chair refused to provide any idea of what maximum employment would look like. On the rate front, Powell also explained that they think they can be patient with rates right now as they want more time to see in what shape the economy is in after the current covid shocks have calmed and after bottlenecks have eased.
Overall, a policy meeting that was hawkish in their actions but dovish in their words.
2. Real Yields
With a Q4 taper start and mid-2022 taper conclusion on the card, we think further downside in real yields will be a struggle and the probability are skewed higher given the outlook for growth, inflation and policy, and higher real yields should be supportive for the USD in the med-term.
3. The global risk outlook
One supporting factor for the USD from June was the onset of downside surprises in global growth. However, there has been a growing chorus of market participants looking for a possible bounce in growth data in Q4 after the covid and supply chain related slowdown in Q3. If we do indeed see a pickup in growth, while inflation is still elevated, that would mean a reflationary environment, which is usually a negative input for the Dollar, so we want to keep that in mind when assessing the incoming US economic data in the next few weeks.
4. Economic Data
With the FOMC in the mix, the other economic data points largely took a back seat this past week, with even NFP not really creating a lot of meaningful or sustainable volatility. We did however see a late session sell-off in the Dollar, which was arguably more driven by technical factors as the Dollar topped out at key technical resistance and could also have been some profit taking after the recent push higher. This upcoming week’s main economic event will be Oct CPI and will be an event worth keeping on the radar after this past week’s FOMC.
5. CFTC Analysis
Latest CFTC data showed a positioning change of +525 with a net non-commercial position of +34982. Positioning isn’t anywhere near stress levels for the USD, but the speed of the build-up in large specular positioning has been sizeable on a 1-year look back period. Thus, even though the med-term bias remains unchanged, it does mean the USD could be sensitive to mean reversion risks just like we saw on Friday while we are still trading close to YTD highs.
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