1. The Monetary Policy outlook for the RBNZ

At their October meeting, the RBNZ delivered on market expectations and raised the OCR by 25-basis points to an OCR of 0.50%. As the 25- basis point hike was already fully priced in, the fact that the bank did not provide any new additional information saw a textbook buy-therumour-sell-the-fact price reaction with the NZD pushing lower. As has recently been the case with most central bank commentary, there was additional focus on the RBNZ expecting that headline CPI inflation to increase above 4 percent in the near term, but the most important part of that part of the statement was the subsequent comment that the bank still sees CPI returning towards the 2 percent midpoint over the medium term. Furthermore, the most important take away from the RBNZ statement for us was 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 August meeting. Unsurprisingly, the bank also stated that their future rate path is contingent on the mediumterm outlook for inflation and employment, which means keeping close tabs on incoming data and the virus situation 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 firmly titled to the upside as the bank remains the most hawkish among the major central banks. As interest rates keeps rising, we think the currency’s carry attractiveness will be a key focus point for the NZD in the months ahead.

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. The country’s economic and health developments

So far, the virus situation in New Zealand has been a flash in the pan worry. The government has been able to trace the source of the recent outbreak and should be able to keep the situation under control. Any further escalation though will be important to watch.

4. CFTC Analysis

Latest CFTC data showed a positioning change of -2190 with a net non-commercial position of +8052. The flush lower in the NZD after the RBNZ was in line with our expectations as the bar for a hawkish surprise was quite high going into the meeting. However, after the buy-the-rumour- sell-the-fact reaction and subsequent flush lower, the NZD is back at some very attractive med-term levels, especially versus the low-yielding currencies like the JPY and the CHF, thus we like the odds of looking for med-term allocations to the upside in the NZDJPY and NZDCHF .



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 improved considerably after the pandemic as a result of the global vaccine roll out and the unprecedented amount of monetary policy accommodation and fiscal support from governments. The Delta variant and subsequent 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 negative drivers, the CHF saw some surprisingly strength from June. This divergence from the fundamental outlook didn’t make much sense, but 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 which could explain some of the recent price action. We also need to be careful of the possibility of SNB FX intervention. Apart from that, ING investment bank has recently argued that recent CHF strength could 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. They also expanded that the ECB’s bond buying 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 the need for any meaningful FX intervention lately. 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

Latest CFTC data showed a positioning change of -4092 with a net non-commercial position of -15679. The CHF positioning continued to unwind some of its recent surprising strength over the past few weeks. The CHF is back inside net-short territory as one would expect from a currency with an overall med-term bearish outlook. 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 and is always something to keep in mind.


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