EUR
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.
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.