NZD USD - FUNDAMENTAL DRIVERS
NZD
FUNDAMENTAL BIAS: BULLISH
1. The Monetary Policy outlook for the RBNZ
In Oct the RBNZ delivered on expectations to raise the OCR to 0.50%. As the hike was fully priced, the lack of new hawkish tones saw a textbook buy-the-rumour-sell-the-fact reaction in the NZD. There was additional focus on the RBNZ’s forecast of >4% in the near term. But the most important part of the statement was that the bank still sees CPI returning towards the 2% midpoint over the med-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 Aug meeting. Unsurprisingly, the bank also stated that their future rate path is contingent on the med-term outlook for CPI and employment, which means keeping close tabs on the data and covid 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 bullish, and as rates keeps rising, the currency’s carry attractiveness will be a key focus point for the NZD in the months ahead. The upcoming Nov meeting will be an important one so make sure to catch up for this in our Must-Read Section of the terminal.
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
We heard some good news last week 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 or the RBNZ had expected and is part of the reason why some participants are looking for a 50bsp hike from the RBNZ this week. Whether 25 or 50, the chance for tradable volatility is definitely there this week.
4. CFTC Analysis (CFTC data delayed with Veteran’s Day)
Latest CFTC data showed a positioning change of -979 with a net non-commercial position of +12882. The NZD now reflects the 2nd biggest netlong positioning for large speculators as well as the biggest for leveraged funds. This is important to know going into the RBNZ meeting on Wednesday as it means the bar is higher for a big upside surprise compared to a big downside surprise. As long as the bank doesn’t downgrade their OCR projections, the carry component of the NZ cash rate will be an important driver to watch in the year ahead.
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 it’s 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 cards, further material downside in real yields looks like a struggle, and upside from here should be supportive for the USD. However, we are growing cautious of nominal yields right now, with possible downside risks brewing it means real yields could continue to drift lower, which have not yet hurt the greenback, but is something to keep on the radar.
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 and global economic data in the next few weeks. Especially with last week’s covid fears, any downgrades to growth expectations should support the Dollar from a safe haven perspective.
4. Economic Data
Fed speak will be in focus in the week ahead, after the comments from Fed’s Clarida on Friday where he explained there is scope for a discussion Dec surrounding the possibility of an increase in the tapering pace. Even though that is not our base case right now, any further confirmation of this type of tone and rhetoric could be a sign that the median FOMC is moving towards upping the pace (which should be USD positive).
5. CFTC Analysis (CFTC data delayed with Veteran’s Day)
Latest CFTC data showed a positioning change of +466 with a net non-commercial position of +35448. Positioning isn’t anywhere near stress levels for the USD, but the speed of the build-up in large speculator positioning has been sizeable in a short space of time. Thus, even though the med-term bias remains unchanged, it does mean the USD could be sensitive to mean reversion risks, especially trading at YTD highs.
FUNDAMENTAL BIAS: BULLISH
1. The Monetary Policy outlook for the RBNZ
In Oct the RBNZ delivered on expectations to raise the OCR to 0.50%. As the hike was fully priced, the lack of new hawkish tones saw a textbook buy-the-rumour-sell-the-fact reaction in the NZD. There was additional focus on the RBNZ’s forecast of >4% in the near term. But the most important part of the statement was that the bank still sees CPI returning towards the 2% midpoint over the med-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 Aug meeting. Unsurprisingly, the bank also stated that their future rate path is contingent on the med-term outlook for CPI and employment, which means keeping close tabs on the data and covid 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 bullish, and as rates keeps rising, the currency’s carry attractiveness will be a key focus point for the NZD in the months ahead. The upcoming Nov meeting will be an important one so make sure to catch up for this in our Must-Read Section of the terminal.
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
We heard some good news last week 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 or the RBNZ had expected and is part of the reason why some participants are looking for a 50bsp hike from the RBNZ this week. Whether 25 or 50, the chance for tradable volatility is definitely there this week.
4. CFTC Analysis (CFTC data delayed with Veteran’s Day)
Latest CFTC data showed a positioning change of -979 with a net non-commercial position of +12882. The NZD now reflects the 2nd biggest netlong positioning for large speculators as well as the biggest for leveraged funds. This is important to know going into the RBNZ meeting on Wednesday as it means the bar is higher for a big upside surprise compared to a big downside surprise. As long as the bank doesn’t downgrade their OCR projections, the carry component of the NZ cash rate will be an important driver to watch in the year ahead.
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 it’s 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 cards, further material downside in real yields looks like a struggle, and upside from here should be supportive for the USD. However, we are growing cautious of nominal yields right now, with possible downside risks brewing it means real yields could continue to drift lower, which have not yet hurt the greenback, but is something to keep on the radar.
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 and global economic data in the next few weeks. Especially with last week’s covid fears, any downgrades to growth expectations should support the Dollar from a safe haven perspective.
4. Economic Data
Fed speak will be in focus in the week ahead, after the comments from Fed’s Clarida on Friday where he explained there is scope for a discussion Dec surrounding the possibility of an increase in the tapering pace. Even though that is not our base case right now, any further confirmation of this type of tone and rhetoric could be a sign that the median FOMC is moving towards upping the pace (which should be USD positive).
5. CFTC Analysis (CFTC data delayed with Veteran’s Day)
Latest CFTC data showed a positioning change of +466 with a net non-commercial position of +35448. Positioning isn’t anywhere near stress levels for the USD, but the speed of the build-up in large speculator positioning has been sizeable in a short space of time. Thus, even though the med-term bias remains unchanged, it does mean the USD could be sensitive to mean reversion risks, especially trading at YTD highs.
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