NZD CHF - 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.
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 remains constructive in the med-term due to the global vaccine roll out and the massive amount of monetary policy and fiscal support from governments. The Delta variant and its 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 overall fundamental bearish bias, the CHF continues to remain surprisingly strong in the past few weeks. This divergence from the fundamental outlook does not make much sense, but this is a friendly reminder that 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, but it has not been enough to explain the current divergence between the CHF and its fundamental outlook. Apart from that, SNB intervention is of course always a downside risk to keep in mind, especially with the important EURCHF exchange rate drifting into an area between 1.07 and 1.05 which have in previous years sparked additional intervention from the bank. Apart from that, ING investment bank has argued that recent CHF strength could also 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 relative to the spot price. The bank also expanded that the ECB’s bond buying programs 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 need for ramping up FX interventions as much as we would usually
expect when EURCHF drift lower into key ‘intervention territory’. 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 (CFTC data delayed with Veteran’s Day)
Latest CFTC data showed a positioning change of +3605 with a net non-commercial position of -17043. 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, arguably more for the stretched JPY but risk off should benefit the CHF as well. With the EURCHF pair dipping below 1.0450, the odds of intervention have risen quite a lot, but it seems that the SNB has not been as quick and forceful to respond as they have in previous years. At the current price levels, the EURCHF still looks attractive for some mean reversion value longs. But, if you choose to trade the CHF, be ready for some unexpected price action from time to time.
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.
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 remains constructive in the med-term due to the global vaccine roll out and the massive amount of monetary policy and fiscal support from governments. The Delta variant and its 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 overall fundamental bearish bias, the CHF continues to remain surprisingly strong in the past few weeks. This divergence from the fundamental outlook does not make much sense, but this is a friendly reminder that 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, but it has not been enough to explain the current divergence between the CHF and its fundamental outlook. Apart from that, SNB intervention is of course always a downside risk to keep in mind, especially with the important EURCHF exchange rate drifting into an area between 1.07 and 1.05 which have in previous years sparked additional intervention from the bank. Apart from that, ING investment bank has argued that recent CHF strength could also 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 relative to the spot price. The bank also expanded that the ECB’s bond buying programs 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 need for ramping up FX interventions as much as we would usually
expect when EURCHF drift lower into key ‘intervention territory’. 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 (CFTC data delayed with Veteran’s Day)
Latest CFTC data showed a positioning change of +3605 with a net non-commercial position of -17043. 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, arguably more for the stretched JPY but risk off should benefit the CHF as well. With the EURCHF pair dipping below 1.0450, the odds of intervention have risen quite a lot, but it seems that the SNB has not been as quick and forceful to respond as they have in previous years. At the current price levels, the EURCHF still looks attractive for some mean reversion value longs. But, if you choose to trade the CHF, be ready for some unexpected price action from time to time.