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.
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. 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. 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 and stretched positioning, we would favour short-term upside catalysts over trying to chase the currency lower in the short-term.
JPY
FUNDAMENTAL OUTLOOK: BEARISH
BASELINE
In recent weeks, yield differentials have been the biggest negative driver for the JPY with the BoJ keeping 10-year JGB yields capped at 0.25% with yield curve control while other central banks are hiking rates aggressively. Thus, the BoJ’s reluctance to shift on policy even with inflation starting to push higher remains a negative driver for the JPY. Even though the JPY is considered a safe haven, inflows has been limited in the current bear market compared to other cycles. The reason is Japan’s current account surplus (a main reason for safe haven appeal) has deteriorated due to the rise in commodity prices. Japan imports the bulk of their commodities , so very high energy prices has added to downside. The BoJ and MoF’s reluctance to intervene to stop the rapid depreciation in the JPY in recent weeks has been noticeable. As long as they just voice their dislike but fail to act, the market will keep testing them. Having said that, US10Y and commodities have been reacting more and more negative to the current negative cyclical growth outlook, and as a result has seen big players trim their massive JPY shorts. If this continues it should continue to support the currency on any negative data surprises from the US, especially given the size of current JPY short positions.
POSSIBLE BULLISH SURPRISES
Catalyst that triggers speculation that the BoJ could drop YCC or hike rates or both (big upside surprises in inflation ) could trigger upside in JPY, which means inflation data will be important to keep on the radar. Catalysts that trigger meaningful corrections in US10Y (less hawkish Fed, faster deceleration in US inflation , faster deceleration in US growth) or meaningful bouts of risk off sentiment could trigger bullish reactions from the JPY. Any catalyst that triggers meaningful downside in key commodities like Oil (deteriorating demand outlook, ease in supply shortage) could trigger bullish JPY reactions. Any intervention from the BoJ or MoF to stop JPY depreciation (buying the JPY or giving firm and clear lines in the sand for USDJPY ) could offer decent reprieve for the JPY.
POSSIBLE BEARISH SURPRISES
With yield differentials playing such a huge role for the JPY, any catalysts that push US10Y higher (more aggressive Fed, further acceleration in US inflation , better-than-expected US growth data) could trigger further bearish price action for the JPY. Any catalyst that creates further upside in oil prices (further supply concerns, geopolitical tensions) poses downside risks for Japan’s current account surplus and could trigger further bearish reactions in the JPY. Further reluctance from the BoJ and MoF to address the concerning depreciation in the JPY, and further reluctance from the BoJ to pivot away from very dovish policy is a continued negative driver for the JPY to keep on the radar. If the BoJ pushes back against calls for a policy shift despite upside surprise in CPI could trigger further JPY downside.
BIGGER PICTURE
The fundamental outlook remains bearish for the JPY, especially after the BoJ once again stuck to the same overly dovish script at their July meeting. As long as US10Y gains ground and as long as the BoJ stays stubbornly dovish and no push back is made against the JPY weakness from the BoJ or MoF, the bias remains lower. But take note of positioning which means we don’t want to chase the JPY lower and bullish reactions can see outsized upside on big drops in US10Y & commodities . It also means watching incoming CPI data closely as any huge upside surprises could trigger speculation of a possible policy shift.
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.
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. 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. 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 and stretched positioning, we would favour short-term upside catalysts over trying to chase the currency lower in the short-term.
JPY
FUNDAMENTAL OUTLOOK: BEARISH
BASELINE
In recent weeks, yield differentials have been the biggest negative driver for the JPY with the BoJ keeping 10-year JGB yields capped at 0.25% with yield curve control while other central banks are hiking rates aggressively. Thus, the BoJ’s reluctance to shift on policy even with inflation starting to push higher remains a negative driver for the JPY. Even though the JPY is considered a safe haven, inflows has been limited in the current bear market compared to other cycles. The reason is Japan’s current account surplus (a main reason for safe haven appeal) has deteriorated due to the rise in commodity prices. Japan imports the bulk of their commodities , so very high energy prices has added to downside. The BoJ and MoF’s reluctance to intervene to stop the rapid depreciation in the JPY in recent weeks has been noticeable. As long as they just voice their dislike but fail to act, the market will keep testing them. Having said that, US10Y and commodities have been reacting more and more negative to the current negative cyclical growth outlook, and as a result has seen big players trim their massive JPY shorts. If this continues it should continue to support the currency on any negative data surprises from the US, especially given the size of current JPY short positions.
POSSIBLE BULLISH SURPRISES
Catalyst that triggers speculation that the BoJ could drop YCC or hike rates or both (big upside surprises in inflation ) could trigger upside in JPY, which means inflation data will be important to keep on the radar. Catalysts that trigger meaningful corrections in US10Y (less hawkish Fed, faster deceleration in US inflation , faster deceleration in US growth) or meaningful bouts of risk off sentiment could trigger bullish reactions from the JPY. Any catalyst that triggers meaningful downside in key commodities like Oil (deteriorating demand outlook, ease in supply shortage) could trigger bullish JPY reactions. Any intervention from the BoJ or MoF to stop JPY depreciation (buying the JPY or giving firm and clear lines in the sand for USDJPY ) could offer decent reprieve for the JPY.
POSSIBLE BEARISH SURPRISES
With yield differentials playing such a huge role for the JPY, any catalysts that push US10Y higher (more aggressive Fed, further acceleration in US inflation , better-than-expected US growth data) could trigger further bearish price action for the JPY. Any catalyst that creates further upside in oil prices (further supply concerns, geopolitical tensions) poses downside risks for Japan’s current account surplus and could trigger further bearish reactions in the JPY. Further reluctance from the BoJ and MoF to address the concerning depreciation in the JPY, and further reluctance from the BoJ to pivot away from very dovish policy is a continued negative driver for the JPY to keep on the radar. If the BoJ pushes back against calls for a policy shift despite upside surprise in CPI could trigger further JPY downside.
BIGGER PICTURE
The fundamental outlook remains bearish for the JPY, especially after the BoJ once again stuck to the same overly dovish script at their July meeting. As long as US10Y gains ground and as long as the BoJ stays stubbornly dovish and no push back is made against the JPY weakness from the BoJ or MoF, the bias remains lower. But take note of positioning which means we don’t want to chase the JPY lower and bullish reactions can see outsized upside on big drops in US10Y & commodities . It also means watching incoming CPI data closely as any huge upside surprises could trigger speculation of a possible policy shift.