NZD: Looking short-term oversold – BNZ

Jason Wong, Currency Strategist at BNZ, suggests that over the year to date the NZD has underperformed, against economic fundamentals which have remained supportive and these include high risk appetite and strong NZ terms of trade.

Key Quotes

“Net speculative short positioning is the greatest in nearly two years.”

“Thus, there is a low hurdle rate for the NZD to recover over coming weeks and months. That said, ultimately see NZD/USD and NZD/EUR ending the year at 0.67 and 0.59 respectively. Economic relativities are expected to encourage NZD/AUD to gravitate to the mid 0.90s.”

“What makes the recent fall in the NZD more remarkable, compared to other episodes is that it has come over a time when fundamental factors have been generally supportive. This can be illustrated by our short term fair value NZD model. At the end of April, the gap between spot and fair value had extended to 8%, the largest gap since March 2009, or the depths of the GFC.”

“We think that the RBNZ’s neutral policy tone has been successful in containing rates and the NZD. We get an update from the RBNZ next week but its prevailing view is that there is an equal chance of an OCR cut or hike and any policy adjustment is expected to be far into the future, around late 2019.”

“That guidance looks likely to change, as inflation has significantly surprised the RBNZ on the upside and the weaker-than-expected NZD adds further upside to the RBNZ’s inflation projections. The Bank is unlikely to embrace the market’s view that a rate hike could come as soon as May next year, but incrementally through the year we see the Bank changing its tune towards a more hawkish tone.”

“We conclude that recent selling of the NZD has not really been justified and on that basis, we could well see a recovery of sorts into the low 0.70s over coming weeks and months. The stage then becomes set for the NZD to resume a weaker trend, towards our year-end target 0.67 on the back of the deterioration in the fundamental forces we expect. With the Fed in the midst of a tightening cycle, a more hawkish RBNZ in the second half of the year isn’t expected to prevent slippage in NZD/USD.”