NZD
FUNDAMENTAL BIAS: BULLISH
1. Developments surrounding the global risk outlook.
As a high-beta currency, NZD has benefited from the market's improving risk outlook over recent months as participants moved out of safehavens and into riskier, higher-yielding assets. As a pro-cyclical currency, the NZD enjoyed upside alongside other cyclical assets going into what majority of market participants think was an early post-recession recovery phase. As long as expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the NZD in the med-term .
2. The Monetary Policy outlook for the RBNZ
The RBNZ delivered a very hawkish tils during their July policy meeting, by announcing that they will be completely stopping purchases under their LSAP program from the 23rd of July. Going into the meeting markets were already expecting the bank to cut rates as soon as November, which meant that tapering QE was a necessary prerequisite for the bank to signal that they are indeed planning to hike rates this year. However, after the hawkish tilt, and especially after the solid beat in Q2 CPI on Friday, OIS markets are pricing in about a 70% chance of a hike as soon as the August meeting. Even though the meeting and beat in CPI is of course positive and suggests tighter policy, the bank called July’s decision a ‘least regrets’ policy and added that ‘some monetary stimulus remains necessary’ to reach their goals. This does not sound like a bank that is very excited to hike rates this month or even hike three times before year end as some participants expect. Thus, there is a chance that markets might have been a bit too aggressive in their expectations and could be setting up for a disappointment. However, whether that is the case or not, the tilt from the bank and the beat in CPI is expected to be a supportive factor for the NZD going into the August policy meeting.
3. The country’s economic and health developments
A solid Q2 Jobs report has seen OIS markets pricing in close to a 100% chance of a hike at the RBNZ’s August meeting, with more participants now seeing a high probability of 3 hikes from the bank before year-end and the possibility of a fourth in Q1 of 2022. That would place the RBNZ miles ahead of its peers in terms of their policy stance and the divergence should continue to provide a favourable environment for the NZD, which in our opinion has not been pricing in its fundamental realities as much as the bond market has.
4. CFTC Analysis
It seems the challenges facing China as well as a few jittery risk sentiment days has seen market participants reduce positioning in the NZD (- 1746) with the net-positioning still close to neutral. This doesn’t really reflect the current fundamental outlook for the NZD with a rate hike fully expected for later this month. One can argue that the NZD has been trading more muted with a lot of the positive potentially already reflected in the price, but that would be quite surprising given that the NZD haven’t been trading as strong as it’s fundamentals suggest. That means with a neutral positioning there should be further scope for upside, but risk sentiment will of course be important to watch as always.
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. Swiss economic data rarely proves market moving; and 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 bearish tone and a preference for being behind the ECB in terms of policy decisions. The market's overall risk tone is improving with coronavirus vaccines being rolled out as well as the unprecedented amount of monetary policy accommodation and fiscal support from governments. Of course, risks remain as many countries are now battling third waves of the virus. As such, there is still a degree of uncertainty and risks to the overall risk outlook which could prove supportive for the CHF should negative factors for the global economy develop; however, on balance the overall risk outlook is continuing to improve and barring any major meltdowns in risk assets the bias for the CHF remains bearish .
2. CFTC Analysis
Despite the negative drivers, the CHF has remained surprisingly strong over the past couple of weeks. This divergence from the fundamental outlook doesn’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, thus be careful when trading the CHF and always keep the possibility of SNB intervention in mind. In a recent note ING investment provided their rationale for the recent strength in the CHF and explained that the lower inflation in Switzerland compared to the EU means the real trade-weighted CHF is actually trading too cheap. Furthermore, the ECB’s bond buying has meant that their balance sheet is expanding more rapidly compared to that of the SNB, and without any meaningful FX intervention the CHF runs the risk of slowly creeping higher, especially versus the EUR.
The positioning for the CHF reveals the surprising strength of the currency over the past few weeks as it is now the third largest net-long positioning among the major currencies. At the current level of positioning, one has to argue that the CHF offers attractive levels to sell into, but as the above comments noted, there might have been idiosyncratic factors providing support for the CHF. However, if the recent Fed rhetoric and Friday’s US jobs report sparks some risk off flows in the week ahead that could provide further support for the CHF, which means keeping a close eye on risk sentiment will be important as always.
FUNDAMENTAL BIAS: BULLISH
1. Developments surrounding the global risk outlook.
As a high-beta currency, NZD has benefited from the market's improving risk outlook over recent months as participants moved out of safehavens and into riskier, higher-yielding assets. As a pro-cyclical currency, the NZD enjoyed upside alongside other cyclical assets going into what majority of market participants think was an early post-recession recovery phase. As long as expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the NZD in the med-term .
2. The Monetary Policy outlook for the RBNZ
The RBNZ delivered a very hawkish tils during their July policy meeting, by announcing that they will be completely stopping purchases under their LSAP program from the 23rd of July. Going into the meeting markets were already expecting the bank to cut rates as soon as November, which meant that tapering QE was a necessary prerequisite for the bank to signal that they are indeed planning to hike rates this year. However, after the hawkish tilt, and especially after the solid beat in Q2 CPI on Friday, OIS markets are pricing in about a 70% chance of a hike as soon as the August meeting. Even though the meeting and beat in CPI is of course positive and suggests tighter policy, the bank called July’s decision a ‘least regrets’ policy and added that ‘some monetary stimulus remains necessary’ to reach their goals. This does not sound like a bank that is very excited to hike rates this month or even hike three times before year end as some participants expect. Thus, there is a chance that markets might have been a bit too aggressive in their expectations and could be setting up for a disappointment. However, whether that is the case or not, the tilt from the bank and the beat in CPI is expected to be a supportive factor for the NZD going into the August policy meeting.
3. The country’s economic and health developments
A solid Q2 Jobs report has seen OIS markets pricing in close to a 100% chance of a hike at the RBNZ’s August meeting, with more participants now seeing a high probability of 3 hikes from the bank before year-end and the possibility of a fourth in Q1 of 2022. That would place the RBNZ miles ahead of its peers in terms of their policy stance and the divergence should continue to provide a favourable environment for the NZD, which in our opinion has not been pricing in its fundamental realities as much as the bond market has.
4. CFTC Analysis
It seems the challenges facing China as well as a few jittery risk sentiment days has seen market participants reduce positioning in the NZD (- 1746) with the net-positioning still close to neutral. This doesn’t really reflect the current fundamental outlook for the NZD with a rate hike fully expected for later this month. One can argue that the NZD has been trading more muted with a lot of the positive potentially already reflected in the price, but that would be quite surprising given that the NZD haven’t been trading as strong as it’s fundamentals suggest. That means with a neutral positioning there should be further scope for upside, but risk sentiment will of course be important to watch as always.
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. Swiss economic data rarely proves market moving; and 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 bearish tone and a preference for being behind the ECB in terms of policy decisions. The market's overall risk tone is improving with coronavirus vaccines being rolled out as well as the unprecedented amount of monetary policy accommodation and fiscal support from governments. Of course, risks remain as many countries are now battling third waves of the virus. As such, there is still a degree of uncertainty and risks to the overall risk outlook which could prove supportive for the CHF should negative factors for the global economy develop; however, on balance the overall risk outlook is continuing to improve and barring any major meltdowns in risk assets the bias for the CHF remains bearish .
2. CFTC Analysis
Despite the negative drivers, the CHF has remained surprisingly strong over the past couple of weeks. This divergence from the fundamental outlook doesn’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, thus be careful when trading the CHF and always keep the possibility of SNB intervention in mind. In a recent note ING investment provided their rationale for the recent strength in the CHF and explained that the lower inflation in Switzerland compared to the EU means the real trade-weighted CHF is actually trading too cheap. Furthermore, the ECB’s bond buying has meant that their balance sheet is expanding more rapidly compared to that of the SNB, and without any meaningful FX intervention the CHF runs the risk of slowly creeping higher, especially versus the EUR.
The positioning for the CHF reveals the surprising strength of the currency over the past few weeks as it is now the third largest net-long positioning among the major currencies. At the current level of positioning, one has to argue that the CHF offers attractive levels to sell into, but as the above comments noted, there might have been idiosyncratic factors providing support for the CHF. However, if the recent Fed rhetoric and Friday’s US jobs report sparks some risk off flows in the week ahead that could provide further support for the CHF, which means keeping a close eye on risk sentiment will be important as always.