AUD NZD - FUNDAMENTAL DRIVERS
AUD
FUNDAMENTAL OUTLOOK: NEUTRAL
BASELINE
Despite a decent recovery from the start of the year, the AUD has struggled in the midst of underlying negative risk sentiment, China’s continued struggles with Covid breakouts, and more recently the big slump in key commodities (Iron Ore & Coal). China’s economy is always a key focus for the AUD. While all major economies are expected to slow in 2022, China is expected to recover (monetary and fiscal policy very stimulative). The expected recovery has been a key focus for our previous bullish AUD bias, which worked out well until a few weeks ago.
Our view was that China’s expected recovery would be enough to keep commodities like Iron Ore supported even while other commodities push lower on global demand concerns, but price action has proven us wrong on that assumption, with Iron Ore dropping close to 30% from the mid-June. The RBA stuck to a higher pace of tightening with a 50bsp hike on in August, but it wasn’t enough to provide the AUD with upside as the bank mentioned their policy is not on a pre-determined path and also expressed growing concerns about consumers. While Iron Ore prices stays pressured and covid lockdowns in China persists, we have a neutral bias for the AUD.
POSSIBLE BULLISH SURPRISES
Positive Covid developments in China (easing restrictions, more fiscal or monetary stimulus, or letting go of the covidzero policy) could trigger bullish reactions in the AUD. As a risk sensitive currency, catalysts that causes big bouts of risk on sentiment could trigger bullish reactions in the AUD. Any catalyst that triggers some recovery in Australia’s key commodity exports (China stimulus, lifting covid restrictions, new infrastructure projects in China, higher inflation fears) should be supportive for the AUD. With the RBA just getting started with their hiking cycle, there is scope for them to turn more aggressive, which means any overly hawkish triggers from their meeting this week could trigger some bullish reactions.
POSSIBLE BEARISH SURPRISES
Negative Covid developments in China (increasing restrictions or adding new ones) could trigger bearish reactions in the AUD. As a risk sensitive currency, catalysts that causes big bouts of risk off sentiment could trigger bearish reactions in the AUD. Any catalyst that triggers more downside in Australia’s key commodity exports (additional China restrictions, demand destruction fears, and additional news on recent centralized iron ore buyers) could be negative for the AUD. Despite CPI >6% we’ve recently heard typical stubbornly hesitant comments pushing back against aggressive tightening implied by STIRs. Thus, any overly dovish comments from the bank this week or simply failing to surprise with a bigger hike than what is priced can trigger bearish reactions in the AUD.
BIGGER PICTURE
The bigger picture outlook for the AUD is neutral for now, but that is largely dependent on what happens to China and whether key commodities like Iron Ore and Coal can stop their recent bleeding. Until the covid situation improves materially, and until commodities and China’s growth stabilizes, the AUD is best suited for short-term tradesin line with strong short-term sentiment.
NZD
FUNDAMENTAL OUTLOOK: NEUTRAL
BASELINE
Despite the RBNZ being one of the most hawkish central banks from 2021, it hasn’t been enough to provide any meaningful trending support for the NZD. The cyclical concerns for the global economy, alongside concerns from China regarding their struggles with their covid-zero policy as well as recent big falls in commodity prices has kept the NZD pressured. Even though the RBNZ is expecting to keep their hiking cycle intact as they proved at their July meeting, some mild economic concerns have been starting to show up in the recent data, something they alluded to in their statement as well by noting medterm downside risks for the economy. Recent data such as consumer and business confidence has confirmed this view.
Furthermore, a big focus for the RBNZ’s aggressive policy (apart from high inflation of course) has been to try and calm down a very hot housing market, and even though the fall is small we have seen YY house prices cool starting to cool down. These developments on the growth side are not expected to stop the RBNZ’s hiking cycle just yet, but some market participants are expecting a more dovish tone reflecting these concerns and a push back in hike expectations in the months ahead, with some calling for a possible dovish shift potentially as soon as the August meeting coming up next week.
POSSIBLE BULLISH SURPRISES
Tactical positioning looksstretched, and trading at these levels it increases possibility of some mean reversion or position squaring which could trigger some upside in the NZD. Positive Covid developments in China (easing restrictions, more fiscal or monetary stimulus, or letting go of the covidzero policy) could trigger bullish reactions in the NZD. As a risk sensitive currency, and catalyst that causes big bouts of risk on sentiment could trigger bullish reactions in the NZD. With calls for the bank to potentially tilt more dovish, any outsized hike (75bsp) or aggressive push back against those expectations could offer some NZD upside. Any catalyst that triggers some recovery in commodity markets (China stimulus, lifting covid restrictions, new infrastructure projects in China, higher inflation fears; lower growth concerns) should be supportive for the NZD.
POSSIBLE BEARISH SURPRISES
Negative Covid developments in China (increasing restrictions or adding additional ones) could trigger bearish reactions in
the NZD. As a risk sensitive currency, and catalyst that causes big bouts of risk off sentiment could trigger bearish reactions in the NZD. Since a lot of policy tightening has been priced into STIR markets, any negative catalysts that triggers less hawkish RBNZ expectations (faster deceleration in growth or inflation) could trigger downside for the NZD. Watch out for a lowering in OCR expectations at the upcoming meeting as some participants think the bank will announce a slow dovish pivot in the next few meetings. Any catalyst that triggers more downside in commodity markets (additional China restrictions, demand destruction fears, further growth concerns) could weigh on the NZD.
BIGGER PICTURE
The bigger picture outlook for the NZD is neutral for now, but that is largely dependent on what happens to China as the New Zealand economy is also very dependent on trade with China and Australia, and also dependent on whether the RNBZ sticks to their hawkish tone or pivots more dovish in the meetings ahead. Given the RBNZ’s current outlook, we would favour short-term opportunities in the NZD in line with short-term sentiment.
FUNDAMENTAL OUTLOOK: NEUTRAL
BASELINE
Despite a decent recovery from the start of the year, the AUD has struggled in the midst of underlying negative risk sentiment, China’s continued struggles with Covid breakouts, and more recently the big slump in key commodities (Iron Ore & Coal). China’s economy is always a key focus for the AUD. While all major economies are expected to slow in 2022, China is expected to recover (monetary and fiscal policy very stimulative). The expected recovery has been a key focus for our previous bullish AUD bias, which worked out well until a few weeks ago.
Our view was that China’s expected recovery would be enough to keep commodities like Iron Ore supported even while other commodities push lower on global demand concerns, but price action has proven us wrong on that assumption, with Iron Ore dropping close to 30% from the mid-June. The RBA stuck to a higher pace of tightening with a 50bsp hike on in August, but it wasn’t enough to provide the AUD with upside as the bank mentioned their policy is not on a pre-determined path and also expressed growing concerns about consumers. While Iron Ore prices stays pressured and covid lockdowns in China persists, we have a neutral bias for the AUD.
POSSIBLE BULLISH SURPRISES
Positive Covid developments in China (easing restrictions, more fiscal or monetary stimulus, or letting go of the covidzero policy) could trigger bullish reactions in the AUD. As a risk sensitive currency, catalysts that causes big bouts of risk on sentiment could trigger bullish reactions in the AUD. Any catalyst that triggers some recovery in Australia’s key commodity exports (China stimulus, lifting covid restrictions, new infrastructure projects in China, higher inflation fears) should be supportive for the AUD. With the RBA just getting started with their hiking cycle, there is scope for them to turn more aggressive, which means any overly hawkish triggers from their meeting this week could trigger some bullish reactions.
POSSIBLE BEARISH SURPRISES
Negative Covid developments in China (increasing restrictions or adding new ones) could trigger bearish reactions in the AUD. As a risk sensitive currency, catalysts that causes big bouts of risk off sentiment could trigger bearish reactions in the AUD. Any catalyst that triggers more downside in Australia’s key commodity exports (additional China restrictions, demand destruction fears, and additional news on recent centralized iron ore buyers) could be negative for the AUD. Despite CPI >6% we’ve recently heard typical stubbornly hesitant comments pushing back against aggressive tightening implied by STIRs. Thus, any overly dovish comments from the bank this week or simply failing to surprise with a bigger hike than what is priced can trigger bearish reactions in the AUD.
BIGGER PICTURE
The bigger picture outlook for the AUD is neutral for now, but that is largely dependent on what happens to China and whether key commodities like Iron Ore and Coal can stop their recent bleeding. Until the covid situation improves materially, and until commodities and China’s growth stabilizes, the AUD is best suited for short-term tradesin line with strong short-term sentiment.
NZD
FUNDAMENTAL OUTLOOK: NEUTRAL
BASELINE
Despite the RBNZ being one of the most hawkish central banks from 2021, it hasn’t been enough to provide any meaningful trending support for the NZD. The cyclical concerns for the global economy, alongside concerns from China regarding their struggles with their covid-zero policy as well as recent big falls in commodity prices has kept the NZD pressured. Even though the RBNZ is expecting to keep their hiking cycle intact as they proved at their July meeting, some mild economic concerns have been starting to show up in the recent data, something they alluded to in their statement as well by noting medterm downside risks for the economy. Recent data such as consumer and business confidence has confirmed this view.
Furthermore, a big focus for the RBNZ’s aggressive policy (apart from high inflation of course) has been to try and calm down a very hot housing market, and even though the fall is small we have seen YY house prices cool starting to cool down. These developments on the growth side are not expected to stop the RBNZ’s hiking cycle just yet, but some market participants are expecting a more dovish tone reflecting these concerns and a push back in hike expectations in the months ahead, with some calling for a possible dovish shift potentially as soon as the August meeting coming up next week.
POSSIBLE BULLISH SURPRISES
Tactical positioning looksstretched, and trading at these levels it increases possibility of some mean reversion or position squaring which could trigger some upside in the NZD. Positive Covid developments in China (easing restrictions, more fiscal or monetary stimulus, or letting go of the covidzero policy) could trigger bullish reactions in the NZD. As a risk sensitive currency, and catalyst that causes big bouts of risk on sentiment could trigger bullish reactions in the NZD. With calls for the bank to potentially tilt more dovish, any outsized hike (75bsp) or aggressive push back against those expectations could offer some NZD upside. Any catalyst that triggers some recovery in commodity markets (China stimulus, lifting covid restrictions, new infrastructure projects in China, higher inflation fears; lower growth concerns) should be supportive for the NZD.
POSSIBLE BEARISH SURPRISES
Negative Covid developments in China (increasing restrictions or adding additional ones) could trigger bearish reactions in
the NZD. As a risk sensitive currency, and catalyst that causes big bouts of risk off sentiment could trigger bearish reactions in the NZD. Since a lot of policy tightening has been priced into STIR markets, any negative catalysts that triggers less hawkish RBNZ expectations (faster deceleration in growth or inflation) could trigger downside for the NZD. Watch out for a lowering in OCR expectations at the upcoming meeting as some participants think the bank will announce a slow dovish pivot in the next few meetings. Any catalyst that triggers more downside in commodity markets (additional China restrictions, demand destruction fears, further growth concerns) could weigh on the NZD.
BIGGER PICTURE
The bigger picture outlook for the NZD is neutral for now, but that is largely dependent on what happens to China as the New Zealand economy is also very dependent on trade with China and Australia, and also dependent on whether the RNBZ sticks to their hawkish tone or pivots more dovish in the meetings ahead. Given the RBNZ’s current outlook, we would favour short-term opportunities in the NZD in line with short-term sentiment.