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NZD CHF - FUNDAMENTAL DRIVERSNZD FUNDAMENTAL BIAS: WEAK BULLISH 1. Monetary Policy The RBNZ underwhelmed some market participants who were looking for a 50bsp hike as the bank only delivered on a 25bsp hike as consensus was expecting. Even though the NZD took a plunge after the meeting, we don’t think markets are really giving NZD the upside it deserves after the Nov RBNZ decision. Not referring to the knee-jerk lower after the 25bsp hike of course as that was fully priced in and always ran the risk of underwhelming the bulls, but the outlook in the MPR justifies more NZD strength. The upgrades to the economic outlook between Aug and Nov was positive, with growth seen lower in 2022 but much higher in 2023, CPI is seen higher throughout 2022 and 2023, the Unemployment rate seen lower throughout the forecast horizon, and of course the big upgrade tothe OCR which is now seen at 2.6% by 2024, and the bank has brought forward their expectation of reaching the 2.0% neutral rate with 5 quarters. Of course, incoming data will be important (as always) and any new developments with the new Omicron variant will be watched but barring any major deterioration in the economic data the recent sell off in the NZD does seem at odds with the fundamental, policy and economic outlook. 2. Economic and health developments Just as the domestic borders are opening up in New Zealand, the Omicron concerns across the globe are ramping up with governments like the UK lifting the alert level to 4 over the weekend. Even though the government has abandoned a draconian covid-zero strategy, a ramp in Omicron cases can of course see further restrictions being announced. The recent macro data has been much better than both the markets and the RBNZ had expected, but markets have not been too bothered with the incoming data and have not given the NZD the upside it deserves in our opinion. For now, based on the economic and policy outlook the NZD seems undervalued at current prices, but we need to keep close track of the overall risk sentiment given the associated risks of the new variant. 3. 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 CAD 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. 4. CFTC Analysis Latest CFTC data showed a positioning change of +78 with a net non-commercial position of +10708. Positioning is not stretched compared to historical net-long levels, but as the second largest netlong for large speculators and the biggest for leveraged funds there is always scope for unwinding if we see strong bouts of risk off sentiment like we had over the past two weeks. However, it’s very encouraging to see that leveraged funds have once again increased their net-longs despite the recent underperformance from the NZD which could mean that we are not the only ones that sees value in buying the NZD from current ‘undervalued’ levels. 5. The Week Ahead In the week ahead the main drivers for global markets will of course be the huge amount of central bank meetings, so risk sentiment will be important for the NZD on the back of that. Apart from central bank meetings, we do have Governor Orr’s testimony coming up on Tuesday, which will be one to keep on the radar with the new variant in mind. Furthermore, we have quarterly GDP coming up on Wed as well, which will be interesting for the NZD. Recall that most of the recent macro data has been surprising meaningfully to the upside, but the Q3 print is expected to see a decent contraction close to -4.5% due to the Q3 covid lockdowns. Thus, markets are likely to discount a bigger miss as covid-related but could add more importance if we see a much smaller contraction and could be supportive for the NZD. CHF FUNDAMENTAL BIAS: BEARISH 1. Monetary Policy At its most recent meeting, all policies remained unchanged with the policy rate kept at -0.75% and the bank keeping the CHF classification as ‘highly valued’. The bank reiterated an all too familiar willingness to intervene in the FX market in order to counter upward pressure on the CHF. The bankreassured markets that recent upside in the CHF has not gone unnoticed. The bank also noted that the new conditional inflation forecast for 2021 and 2022 is slightly higher than in June but said that this is due to current supply chain challenges and stressed that their longer-term view of inflation is ‘virtually unchanged compared with June’. The bank also explained that the vulnerability of the mortgage and real estate markets have risen, and that they are keeping a close eye on Mortgage lending and residential property prices, but also stated that they regularly assess the possible needs for reactivating the countercyclical buffers. All in all, this meeting provided nothing new for markets and as such was not enough to change our fundamental dovish outlook. 2. Global Risk Outlook As a safe-haven currency, the market's risk outlook is usually the primary driver for the CHF with economic data and SNB policy meetings rarely market moving. Although SNB intervention can have a substantial impact on CHF, its impact tends to be relatively short-lived. Additionally, the SNB are unlikely to adjust policy anytime soon, given their overall dovish disposition and preference for being behind the ECB in terms of policy decisions. The market's overall risk tone remains constructive in the med-term due to the global vaccine roll out and the massive amount of monetary policy and fiscal support from governments. The Delta variant and its impact on growth expectations is of course a sobering reminder that risks remain, especially with new variants like Omicron. Thus, there is still a degree of uncertainty and risks to the overall risk outlook remains which could prove supportive for the safe havens like the CHF should negative factors for the global economy develop. But on balance the overall risk outlook is positive in the med-term. 3. Idiosyncratic Drivers Despite the fundamental bearish bias, the CHF continues to remain surprisingly strong and is a friendly reminder that the CHF often has a mind of its own. Even though SNB intervention is a downside risk to keep in mind, the bank has been surprisingly sanguine with EURCHF breaking below 1.04. Some research argues that recent CHF strength could be due to the lower inflation in Switzerland compared to the EU, UK and US, which has meant more demand for Swiss goods and has meant less need for capital flight. Thus, inflation differentials as well as trade data out of Switzerland could serve as proxies for where the currency goes in the med-term. 4. CFTC Analysis Latest CFTC data showed a positioning change of +2129 with a net non-commercial position of - 12053. With positioning close to neutral for large specs and leveraged funds, the overall driver in the short-term remains underlying risk sentiment, and of course possible SNB intervention. 5. The Week Ahead In the week ahead the main drivers for global markets will of course be the huge amount of central bank meetings, so risk sentiment will be important for the NZD on the back of that. We do also have the SNB coming up later in the week, where the biggest focus will be on what the bank has to say about the CHF’s recent strength, especially versus the EUR. Even though sight deposits have increased after the previous meeting, they are nowhere near the levels compared to previous occasions when the EURCHF was trading sub-1.05. Any commitments to intervene will probably be ignored by markets unless it is backed up with a visible increase in the sight deposits.
by thunderpips
17
EUR NZD - FUNDAMENTAL DRIVERSEUR FUNDAMENTAL BIAS: BEARISH 1. Monetary Policy In Oct the ECB didn’t offer new info on policy or forward guidance. Inflation was the biggest talking point among the GC. The bank acknowledged price pressures will be higher and last longer than previously anticipated. But also reiterated that CPI will move back below their 2% target in the medterm (2023). The meeting was seen as a placeholder meeting for Dec, where they’re expected to announce the way forward for the PEPP and API, with markets expecting a formal end to the PEPP program from March 2022 but looking for info on how and what type of transition to expect for the bond purchase plans. After the meeting, the EUR saw upside initially attributed to the bank not pushing back enough against market forecasts for a hike next year but as we noted the move looked more in line with short covering and month-end USD selling. For now, the bias for policy remains dovish and a negative driver for the EUR. 2. Economic & Health Developments Earlier issues with vaccinations and lockdowns at the start of 2021 weighed on EU growth prospects, with growth differentials against the US and UK still quite wide, despite some of the recent strong economic data. Even though the recent activity data suggests the hit to the economy from previous lockdowns weren’t as bad as feared, the massive climb in case numbers across Europe, and now cases of the new Omicron variant also identified, odds for further lockdowns are increasing. Any further escalation with more member states moving into strict lockdowns will further weigh on growth prospects and the EUR, and as a result (and combined with ongoing central bank policy divergence) the fundamental outlook remains bearish for the EUR. On the fiscal front, attention is still on ongoing discussions among EU states to potentially allow the purchase of green bonds NOT to count against budget deficits. Such a decision could drastically change the fiscal picture and we would expect it to be a big positive for the EUR and EU equities if that change should come to pass. 3. Funding Characteristics The EUR’s funding characteristics are also in focus. As a low yielder (like JPY & CHF), the EUR has been a funding choice among carry trades, especially during 2019 where it was a favourite against high yielding EM’. Also, part of the EUR upside in the initial risk-off scare in March 2020 was attributed to an unwind of large carry trades. Recently the EUR has exhibited some resilience during risk off tones. As more central banks start normalizing policy, the EUR’s use as a funder could add additional pressure in the med-term. But it could also spark risk off upside if some of those trades unwind. This doesn’t make the EUR a safe haven, but as rates climb globally it can become more sensitive to carry. 4. CFTC Analysis Latest CFTC data showed a positioning change of -6788 with a net non-commercial position of 23240. Even though positioning isn’t stretched on the large speculator side, it’s a different story for leveraged funds which is sitting on the biggest net-short for the majors. That means watching key technical levels to the upside for possible squeezes. 5. The Week Ahead It’s a quiet week on the data side for the Eurozone. The main focus for market participants will be on risk sentiment and of course the USD. The consensus short position that was built up in EURUSD over the past few weeks saw short covering push the EUR higher across the board, likely also driven by some funding trades unwinding as well. Thus, this week the focus will be on whether further risk sentiment continues to pressure the Dollar and favour the EUR or whether the usual status quo pushes the pair lower in risk off environments. NZD FUNDAMENTAL BIAS: WEAK BULLISH 1. Monetary Policy The RBNZ underwhelmed some market participants who were looking for a 50bsp hike as the bank only delivered on a 25bsp hike as consensus was expecting. Even though the NZD took a plunge after the meeting, we don’t think markets are really giving NZD the upside it deserves after the Nov RBNZ decision. Not referring to the knee-jerk lower after the 25bsp hike of course as that was fully priced in and always ran the risk of underwhelming the bulls, but the outlook in the MPR justifies more NZD strength. The upgrades to the economic outlook between Aug and Nov was positive, with growth seen lower in 2022 but much higher in 2023, CPI is seen higher throughout 2022 and 2023, the Unemployment rate seen lower throughout the forecast horizon, and of course the big upgrade to the OCR which is now seen at 2.6% by 2024, and the bank has brought forward their expectation of reaching the 2.0% neutral rate with 5 quarters. Of course, incoming data will be important (as always) and any new developments with the new Omicron variant will be watched but barring any major deterioration in the economic data the recent sell off in the NZD does seem at odds with the fundamental, policy and economic outlook. 2. Economic and health developments We heard some good news two weeks with PM Ardern announcing that the whole country will be lifting lockdown restrictions from Nov 29th and that their domestic borders will open up from the middle of Dec, which was a positive move for businesses going into the festive season. The recent macro data has been much better than both the markets and the RBNZ had expected, but markets have not been too bothered with the incoming data. That might start to change as focus turns to the new variant and its potential impact on the global economy. For now, based on the economic and policy outlook the NZD seems undervalued at current prices. 3. 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 CAD 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. 4. CFTC Analysis Latest CFTC data showed a positioning change of -3309 with a net non-commercial position of +10630. Positioning is not stretched compared to historical net-long levels, but as the second largest net-long for large speculators and the biggest for leveraged funds there is always scope for unwinding if we see strong bouts of risk off sentiment like we had over the past two weeks. However, it’s very encouraging to see that leveraged funds have increased their net-long despite the recent underperformance from the NZD. 5. The Week Ahead With the RBNZ out of the way until February, the main focus for the NZD in the med-term will be key quarterly economic data points going into the Fed meeting (none of them are expected this week), and of course overall risk sentiment will be in focus in the short-term. The recent Omicron and Fed-inspired risk off has hit the NZD really hard. Given the economic and policy outlook we still see scope to upside in the NZD, but timing will be very important given the amount of uncertainty sparked by Omicron and the Fed. Barring any major Omicron updates it’ll be worth keeping a close eye on cross-asset implied volatility for signals of when some calm might be restored.
by thunderpips
16
NZD JPY - FUNDAMENTAL DRIVERSNZD FUNDAMENTAL BIAS: WEAK BULLISH 1. Monetary Policy The RBNZ underwhelmed some market participants who were looking for a 50bsp hike as the bank only delivered on a 25bsp hike as consensus was expecting. Even though the NZD took a plunge after the meeting, we don’t think markets are really giving NZD the upside it deserves after the Nov RBNZ decision. Not referring to the knee-jerk lower after the 25bsp hike of course as that was fully priced in and always ran the risk of underwhelming the bulls, but the outlook in the MPR justifies more NZD strength. The upgrades to the economic outlook between Aug and Nov was positive, with growth seen lower in 2022 but much higher in 2023, CPI is seen higher throughout 2022 and 2023, the Unemployment rate seen lower throughout the forecast horizon, and of course the big upgrade to the OCR which is now seen at 2.6% by 2024, and the bank has brought forward their expectation of reaching the 2.0% neutral rate with 5 quarters. Of course, incoming data will be important (as always) and any new developments with the new Omicron variant will be watched but barring any major deterioration in the economic data the recent sell off in the NZD does seem at odds with the fundamental, policy and economic outlook. 2. Economic and health developments We heard some good news two weeks with PM Ardern announcing that the whole country will be lifting lockdown restrictions from Nov 29th and that their domestic borders will open up from the middle of Dec, which was a positive move for businesses going into the festive season. The recent macro data has been much better than both the markets and the RBNZ had expected, but markets have not been too bothered with the incoming data. That might start to change as focus turns to the new variant and its potential impact on the global economy. For now, based on the economic and policy outlook the NZD seems undervalued at current prices. 3. 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 CAD 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. 4. CFTC Analysis Latest CFTC data showed a positioning change of -3309 with a net non-commercial position of +10630. Positioning is not stretched compared to historical net-long levels, but as the second largest net-long for large speculators and the biggest for leveraged funds there is always scope for unwinding if we see strong bouts of risk off sentiment like we had over the past two weeks. However, it’s very encouraging to see that leveraged funds have increased their net-long despite the recent underperformance from the NZD. 5. The Week Ahead With the RBNZ out of the way until February, the main focus for the NZD in the med-term will be key quarterly economic data points going into the Fed meeting (none of them are expected this week), and of course overall risk sentiment will be in focus in the short-term. The recent Omicron and Fed-inspired risk off has hit the NZD really hard. Given the economic and policy outlook we still see scope to upside in the NZD, but timing will be very important given the amount of uncertainty sparked by Omicron and the Fed. Barring any major Omicron updates it’ll be worth keeping a close eye on cross-asset implied volatility for signals of when some calm might be restored. JPY FUNDAMENTAL BIAS: BEARISH 1. Monetary Policy At their Oct meeting the BoJ left policy settings unchanged with rates kept at -0.10% and the JGB yield target kept close to 0%. As usual we saw BoJ’s Kataoka as the only dissenter on YCC. In terms of the economic projections, the bank lowered both their growth and inflation targets as was previously reported prior to the meeting. The bank lowered FY2021 GDP to 3.4% from the prior 3.8%, and lower FY2021 Core CPI to 0.0% from the previous 0.6%. The bank’s outlook report once again explained that Japan’s consumer inflation is likely to gradually grind higher and noted that exports and output are currently weak due to the ongoing supply constraints. However, as with their prior meeting the bank explained that both exports and output is increasing as a trend. At the press conference, Governor Kuroda said that a soft JPY raises costs for households and imports but that he does not think current JPY weakness is a bad thing. He further added that it is desirable for FX to move in a stable manner, reflecting fundamentals and that he thinks the JPY’s current price action reflects the fundamentals. The Governor also added that YCC could lead to a weak JPY as it widens interest rate differentials. 2. 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. 3. 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. With the Fed tilting more aggressive, we think that opens up more room for curve flattening to take place with US02Y likely pushing higher while US10Y underperform. In this environment we do see some mild upside risks for the JPY, but we should not look at the influence from yields in isolation and also weigh it up alongside underlying risk sentiment. 4. CFTC Analysis Latest CFTC data showed a positioning change of +18387 with a net non-commercial position of - 78866. The risk off tones during the past two weeks and the subsequent gains in the JPY showed why stretched positioning is such an important consideration. Even though the JPY’s med-term outlook remains bearish, the big net-shorts for both large speculators and leveraged funds always increases the odds of mean reversion when risk sentiment deteriorates. 5. The Week Ahead This week, the focus for the JPY will be on any further developments with the new Omicron variant with good news expecting to weaken the JPY and bad news expecting to support it. Apart from risk sentiment, keeping a close eye on US10Y and the US yield curve will also be important given the current take from various market participants that the Fed’s aggressive policy path runs the risk of materially denting the med-term growth and inflation outlook.
by thunderpips
12
NZD CAD - FUNDAMENTAL DRIVERSNZD FUNDAMENTAL BIAS: WEAK BULLISH 1. Monetary Policy The RBNZ underwhelmed some market participants who were looking for a 50bsp hike as the bank only delivered on a 25bsp hike as consensus was expecting. Even though the NZD took a plunge after the meeting, we don’t think markets are really giving NZD the upside it deserves after the Nov RBNZ decision. Not referring to the knee-jerk lower after the 25bsp hike of course as that was fully priced in and always ran the risk of underwhelming the bulls, but the outlook in the MPR justifies more NZD strength. The upgrades to the economic outlook between Aug and Nov was positive, with growth seen lower in 2022 but much higher in 2023, CPI is seen higher throughout 2022 and 2023, the Unemployment rate seen lower throughout the forecast horizon, and of course the big upgrade to the OCR which is now seen at 2.6% by 2024, and the bank has brought forward their expectation of reaching the 2.0% neutral rate with 5 quarters. Of course, incoming data will be important (as always) and any new developments with the new Omicron variant will be watched but barring any major deterioration in the economic data the recent sell off in the NZD does seem at odds with the fundamental, policy and economic outlook. 2. Economic and health developments We heard some good news two weeks with PM Ardern announcing that the whole country will be lifting lockdown restrictions from Nov 29th and that their domestic borders will open up from the middle of Dec, which was a positive move for businesses going into the festive season. The recent macro data has been much better than both the markets and the RBNZ had expected, but markets have not been too bothered with the incoming data. That might start to change as focus turns to the new variant and its potential impact on the global economy. For now, based on the economic and policy outlook the NZD seems undervalued at current prices. 3. 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 CAD 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. 4. CFTC Analysis Latest CFTC data showed a positioning change of -3309 with a net non-commercial position of +10630. Positioning is not stretched compared to historical net-long levels, but as the second largest net-long for large speculators and the biggest for leveraged funds there is always scope for unwinding if we see strong bouts of risk off sentiment like we had over the past two weeks. However, it’s very encouraging to see that leveraged funds have increased their net-long despite the recent underperformance from the NZD. 5. The Week Ahead With the RBNZ out of the way until February, the main focus for the NZD in the med-term will be key quarterly economic data points going into the Fed meeting (none of them are expected this week), and of course overall risk sentiment will be in focus in the short-term. The recent Omicron and Fed-inspired risk off has hit the NZD really hard. Given the economic and policy outlook we still see scope to upside in the NZD, but timing will be very important given the amount of uncertainty sparked by Omicron and the Fed. Barring any major Omicron updates it’ll be worth keeping a close eye on cross-asset implied volatility for signals of when some calm might be restored. CAD FUNDAMENTAL BIAS: WEAK BULLISH 1. Monetary Policy At their Oct meeting the BoC surprised by putting an early end to QE purchases and updated forward guidance to suggest an earlier lift off in rates by projecting economic slack to be absorbed by the middle quarters of 2022. The initial reaction was bullish as one would expect but the biggest risk to further upside for the CAD from here is the fact that a lot of these positives that was confirmed by the BoC has already been reflected in both the CAD and rates markets over the past few weeks. The CAD has seen a similar run to the upside back in 1Q21 with the BoC’s hawkish tilt, and similarly to that we feel current prices for rates and the CAD already reflect a great deal of the positives. Thus, even though the med-term outlook remains tilted to the upside for the CAD, there is the risk of seeing some unwind of the recent upside and is something to be mindful of when making any medterm allocations to the upside in the CAD. Last week’s Oct CPI data was a good example of this where the currency saw outsized downside on an uninspiring print. It’s not that CPI was bad, it was broadly in line with expectations, but with all the positives already priced it would have taken a really exceptionally strong print to keep the CAD’s upside momentum going. Another interesting driver for the months ahead, which could put a break on the BoC’s hiking path, is the close to 350% debt to GDP for Canada, which will make it very painful if rates start rising and for some like HSBC means the hike cycle could be very short. 2. Intermarket Analysis Considerations Oil’s massive post-covid recovery has been impressive, driven by three drivers: supply & demand (OPEC’s production cuts); improving global economic outlook and improving oil demand outlook, even though slightly pushed back by Delta concerns; rising inflation expectations. Even though further gains for Oil will arguably prove to be an uphill battle, the bias remains higher in the medterm as long as current supportive factors and drivers remains intact. Oil prices rallied after the US’s SPR release failed to spark any meaningful follow through, but last week’s covid scare was enough to see WTI drop over 12% in the session. Thus, this week’s upcoming OPEC meeting will be very important, as any announcement to pause planned productions cuts could spark some additional upside again. 3. Global Risk Outlook As a high-beta currency, the CAD 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 CAD 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 CAD in the med-term , but recent short-term jitters are a timely reminder that risk sentiment is also a very important short-term driver. 4. CFTC Analysis Latest CFTC data showed a positioning change of -10940 with a net non-commercial position of - 14075. A lot of the previous froth that was priced into the CAD just a few weeks ago has arguably been substantially reduced given the oil and Omicron related downside in risk assets over the past few sessions. That means buying opportunities is starting to look attractive again. 5. The Week Ahead The main calendar event for the CAD in the week ahead is Wednesday’s upcoming BoC meeting. At the meeting markets will be focused on whether the recent Omicron variant is of any major concern to the BoC and whether the bank is also growing more concerned about inflation like the Fed. With the overall economic outlook evolving broadly in line with the bank’s MPR , there is expectations that the bank could err on the hawkish side despite the Omicron concerns, which should be positive for the CAD. Attention will be placed on any comments regarding the output gap to see whether the bank sees the gap being closed earlier (possibly Q1) which would imply the bank is bringing forward hike projections.
by thunderpips
24
NZD JPY - FUNDAMENTAL DRIVERSNZD FUNDAMENTAL BIAS: WEAK BULLISH 1. Monetary Policy The RBNZ underwhelmed some market participants who were looking for a 50bsp hike as the bank only delivered on a 25bsp hike as consensus was expecting. Even though the NZD took a plunge after the meeting, we don’t think markets are really giving NZD the upside it deserves after the Nov RBNZ decision. Not referring to the knee-jerk lower after the 25bsp hike of course as that was fully priced in and always ran the risk of underwhelming the bulls, but the outlook in the MPR justifies more NZD strength. The upgrades to the economic outlook between Aug and Nov was positive, with growth seen lower in 2022 but much higher in 2023, CPI is seen higher throughout 2022 and 2023, the Unemployment rate seen lower throughout the forecast horizon, and of course the big upgrade to the OCR which is now seen at 2.6% by 2024, and the bank has brought forward their expectation of reaching the 2.0% neutral rate with 5 quarters. Of course, incoming data will be important (as always) and any new developments with the new Omicron variant will be watched but barring any major deterioration in the economic data the recent sell off in the NZD does seem at odds with the fundamental, policy and economic outlook. 2. Economic and health developments We heard some good news two weeks with PM Ardern announcing that the whole country will be lifting lockdown restrictions from Nov 29th and that their domestic borders will open up from the middle of Dec, which was a positive move for businesses going into the festive season. The recent macro data has been much better than both the markets and the RBNZ had expected, but markets have not been too bothered with the incoming data. That might start to change as focus turns to the new variant and its potential impact on the global economy. For now, based on the economic and policy outlook the NZD seems undervalued at current prices. 3. 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 CAD 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. 4. CFTC Analysis Latest CFTC data showed a positioning change of -3309 with a net non-commercial position of +10630. Positioning is not stretched compared to historical net-long levels, but as the second largest net-long for large speculators and the biggest for leveraged funds there is always scope for unwinding if we see strong bouts of risk off sentiment like we had over the past two weeks. However, it’s very encouraging to see that leveraged funds have increased their net-long despite the recent underperformance from the NZD. 5. The Week Ahead With the RBNZ out of the way until February, the main focus for the NZD in the med-term will be key quarterly economic data points going into the Fed meeting (none of them are expected this week), and of course overall risk sentiment will be in focus in the short-term. The recent Omicron and Fed-inspired risk off has hit the NZD really hard. Given the economic and policy outlook we still see scope to upside in the NZD, but timing will be very important given the amount of uncertainty sparked by Omicron and the Fed. Barring any major Omicron updates it’ll be worth keeping a close eye on cross-asset implied volatility for signals of when some calm might be restored. JPY FUNDAMENTAL BIAS: BEARISH 1. Monetary Policy At their Oct meeting the BoJ left policy settings unchanged with rates kept at -0.10% and the JGB yield target kept close to 0%. As usual we saw BoJ’s Kataoka as the only dissenter on YCC. In terms of the economic projections, the bank lowered both their growth and inflation targets as was previously reported prior to the meeting. The bank lowered FY2021 GDP to 3.4% from the prior 3.8%, and lower FY2021 Core CPI to 0.0% from the previous 0.6%. The bank’s outlook report once again explained that Japan’s consumer inflation is likely to gradually grind higher and noted that exports and output are currently weak due to the ongoing supply constraints. However, as with their prior meeting the bank explained that both exports and output is increasing as a trend. At the press conference, Governor Kuroda said that a soft JPY raises costs for households and imports but that he does not think current JPY weakness is a bad thing. He further added that it is desirable for FX to move in a stable manner, reflecting fundamentals and that he thinks the JPY’s current price action reflects the fundamentals. The Governor also added that YCC could lead to a weak JPY as it widens interest rate differentials. 2. 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. 3. 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. With the Fed tilting more aggressive, we think that opens up more room for curve flattening to take place with US02Y likely pushing higher while US10Y underperform. In this environment we do see some mild upside risks for the JPY, but we should not look at the influence from yields in isolation and also weigh it up alongside underlying risk sentiment. 4. CFTC Analysis Latest CFTC data showed a positioning change of +18387 with a net non-commercial position of -78866. The risk off tones during the past two weeks and the subsequent gains in the JPY showed why stretched positioning is such an important consideration. Even though the JPY’s med-term outlook remains bearish, the big net-shorts for both large speculators and leveraged funds always increases the odds of mean reversion when risk sentiment deteriorates. 5. The Week Ahead This week, the focus for the JPY will be on any further developments with the new Omicron variant with good news expecting to weaken the JPY and bad news expecting to support it. Apart from risk sentiment, keeping a close eye on US10Y and the US yield curve will also be important given the current take from various market participants that the Fed’s aggressive policy path runs the risk of materially denting the med-term growth and inflation outlook.
by thunderpips
22