NZD CHF - 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.
CHF
FUNDAMENTAL BIAS: BEARISH
1. Developments surrounding the global risk outlook.
As a safe-haven currency, the market's risk outlook is the primary driver for the CHF with Swiss economic data or SNB policy meetings rarely being very 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 improved considerably after the pandemic as a result of the global vaccine roll out and the unprecedented amount of monetary policy accommodation and fiscal support from governments. The Delta variant and subsequent impact on growth expectations is of course a sobering reminder that risks remain. 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. However, on balance the overall risk outlook is still positive in the med-term and barring any major meltdowns in risk assets the bias for the CHF remains bearish in the med-term .
2. Idiosyncratic drivers for the CHF
Despite the negative drivers, the CHF saw some surprisingly strength from June. This divergence from the fundamental outlook didn’t make much sense, but the CHF often has a mind of its own and can often move in opposite directions from what short-term sentiment or its fundamental outlook suggests. Recent research from the team has revealed an interesting correlation between the CHF and simultaneous price action in both Gold and the USD which could explain some of the recent price action. We also need to be careful of the possibility of SNB FX intervention. Apart from that, ING investment bank has recently argued that recent CHF strength could be due to the lower inflation in Switzerland compared to the EU which meant that the real trade-weighted CHF has been trading too cheap. They also expanded that the ECB’s bond buying has meant that their balance sheet is expanding more rapidly compared to that of the SNB, which could have been reasons why the SNB did not see the need for any meaningful FX intervention lately. The bottom line is that there are often plenty of idiosyncratic drivers which might or might not impact the CHF and makes short-term price fluctuations a mixed bag for the most part.
3. CFTC Analysis
Latest CFTC data showed a positioning change of -3339 with a net non-commercial position of -9217. The CHF positioning continued to unwind some of its recent surprising strength over the past few weeks. The CHF is back inside net-short territory as one would expect from a currency with an overall med-term bearish outlook. Even though we expect the currency to continue weakening in the med-term , any drastic escalation in risk off tones could continue to provide support for the safe-haven currency in the short-term.
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.
CHF
FUNDAMENTAL BIAS: BEARISH
1. Developments surrounding the global risk outlook.
As a safe-haven currency, the market's risk outlook is the primary driver for the CHF with Swiss economic data or SNB policy meetings rarely being very 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 improved considerably after the pandemic as a result of the global vaccine roll out and the unprecedented amount of monetary policy accommodation and fiscal support from governments. The Delta variant and subsequent impact on growth expectations is of course a sobering reminder that risks remain. 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. However, on balance the overall risk outlook is still positive in the med-term and barring any major meltdowns in risk assets the bias for the CHF remains bearish in the med-term .
2. Idiosyncratic drivers for the CHF
Despite the negative drivers, the CHF saw some surprisingly strength from June. This divergence from the fundamental outlook didn’t make much sense, but the CHF often has a mind of its own and can often move in opposite directions from what short-term sentiment or its fundamental outlook suggests. Recent research from the team has revealed an interesting correlation between the CHF and simultaneous price action in both Gold and the USD which could explain some of the recent price action. We also need to be careful of the possibility of SNB FX intervention. Apart from that, ING investment bank has recently argued that recent CHF strength could be due to the lower inflation in Switzerland compared to the EU which meant that the real trade-weighted CHF has been trading too cheap. They also expanded that the ECB’s bond buying has meant that their balance sheet is expanding more rapidly compared to that of the SNB, which could have been reasons why the SNB did not see the need for any meaningful FX intervention lately. The bottom line is that there are often plenty of idiosyncratic drivers which might or might not impact the CHF and makes short-term price fluctuations a mixed bag for the most part.
3. CFTC Analysis
Latest CFTC data showed a positioning change of -3339 with a net non-commercial position of -9217. The CHF positioning continued to unwind some of its recent surprising strength over the past few weeks. The CHF is back inside net-short territory as one would expect from a currency with an overall med-term bearish outlook. Even though we expect the currency to continue weakening in the med-term , any drastic escalation in risk off tones could continue to provide support for the safe-haven currency in the short-term.
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