NZD USD - FUNDAMENTAL DRIVERS
NZD
FUNDAMENTAL BIAS: BULLISH
1. The Monetary Policy outlook for the RBNZ
New Zealand’s Zero Covid strategy caused quite the rigmarole for the NZD before the RBNZ’s last meeting as market participants were forced to unwind aggressive expectations for rate hikes going into the meeting. The unwind was so aggressive that OIS prices dropped from a 100% chance of a hike at that meeting to just above 50% going into it. The RBNZ surprised by leaving rates unchanged, but offered an optimistic tone compared to their prior meetings. They projected 7 hikes between Q4 2021 and H1 2023 (bringing the OCR to 2.0%). This was much more aggressive than what markets were expecting. Governor Orr later explained that they cannot wait for uncertainty to move on policy as they have a lot of work to do to get back to the neutral rate of 2.0%. When asked about Oct, the Governor said the meeting is live. Thus, with the upgraded rate path the med-term bullish outlook remains intact for the NZD. A week after their meeting we also had very hawkish comments from RBNZ’s Hawkesby who stated that the bank’s decision not to hike rates was mostly about optics and not due to risks, and also explained that the bank contemplated hiking rates by 50 basis points. This just confirmed the bank’s hawkish pivot and places them miles ahead any other major central banks. The announcement two weeks ago about the RBNZ moving forward with tightening LVR restrictions to curb speculation in the housing market was interesting from a timing point of view. Usually, these type of macroprudential policies takes pressure of the central bank to reign in speculation with higher rates. The announcement has already seen some repricing for October with markets now pricing in a 25-basis point hike instead of a 50-basis point hike for this week’s upcoming meeting on Wednesday.
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 AUD 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 +2144 with a net non-commercial position of +10246. This week saw some decent unwind in net-long positions for leveraged funds (fast money) which can also explain some of the oversized downside in the NZD during the past week. With the overall optimistic rate path from the RBNZ, the bias for the currency remains unchanged, and with small net-long positioning the current spot levels for the NZD still looks attractive for med-term buyers but waiting for the RBNZ is a prudent move.
USD
FUNDAMENTAL BIAS: WEAK BULLISH
1. The Monetary Policy outlook for the FED
More hawkish than expected sums up the Sep meeting. The FOMC gave the go ahead for a November tapering announcement as long as the economy develops as expected with their criteria for substantial further progress close to being met. The biggest hawkish tilt was the announcement about a faster pace of tapering, with Chair Powell saying there is broad agreement that tapering can be concluded by mid2022. Inflation projections were hawkish, with the Fed projecting Core PCE above their 2% until 2024. On labour, Chair Powell said he thought the substantial further progress threshold for employment was ‘all but met’ and explained that it won’t take a very strong September jobs print for them to start tapering as just a ‘decent’ print will do. The 2022 Dots stayed very close to the June median, but the rate path was much steeper than markets were anticipating with seven hikes expected over the forecast horizon (from just two previously). It is important here to note though that even though the path was steeper, if one compares that to a projected Core PCE >2% for 2022 to 2024, the rate path does not exactly scream fear when it comes to inflation . All in all, it was a hawkish meeting. Interestingly, it took markets about three days to realize this as the expected price action only really took hold of markets a few days later. A faster tapering was a key factor we were watching for an incrementally bullish tilt in the outlook, so market’s initial reactions were surprising. However, with the recent breakout in both US yields and the USD, this has given us more confidence in moving our fundamental outlook for the Dollar from Neutral to Weak Bullish .
2. Real Yields
With a Q4 taper start and mid-2022 taper conclusion on the card, we think further downside in real yields will be a struggle and the probability are skewed higher given the outlook for growth, inflation and policy, and higher real yields should be supportive for the USD in the med-term .
3. The global risk outlook
One supporting factor for the USD from June was the onset of downside surprises in global growth. However, recent Covid-19 case data from ourworldindata. org has shown a sharp deceleration in new cases globally. Using past occurrences as a template, the reduction in cases is likely to lead to less restrictive measures, which is likely to lead to a strong bounce in economic activity. Thus, even though we have shifted our bias to weak bullish in the med-term , the fall in cases and increased likelihood of a bounce in economic activity could mean downside for the USD from a short to intermediate time horizon (remember a re-acceleration in growth and potentially inflation = reflation)
4. CFTC Analysis
Latest CFTC data showed a positioning change of +1361 with a net non-commercial position of +26461. Positioning isn’t anywhere near stress levels for the USD, but with both large speculators and leveraged funds sitting in net-long territory, it does mean that the Dollar could be more sensitive from mean reversion while still elevated after the recent push higher into new YTD highs.
5. Economic Data
This week we’ll finally have the September NFP print, but all the previous excitement about this event has been mitigated with the Fed’s previous meeting. The Fed’s comments that they don’t need to see a huge or stellar jobs print but that a decent print will do, has largely taken the sting out of the Sep NFP print. The current concerns about inflation means that the Average Hourly Earnings release could be of more interest for market participants to see whether the current labour supply shortage sparks further acceleration in wages.
FUNDAMENTAL BIAS: BULLISH
1. The Monetary Policy outlook for the RBNZ
New Zealand’s Zero Covid strategy caused quite the rigmarole for the NZD before the RBNZ’s last meeting as market participants were forced to unwind aggressive expectations for rate hikes going into the meeting. The unwind was so aggressive that OIS prices dropped from a 100% chance of a hike at that meeting to just above 50% going into it. The RBNZ surprised by leaving rates unchanged, but offered an optimistic tone compared to their prior meetings. They projected 7 hikes between Q4 2021 and H1 2023 (bringing the OCR to 2.0%). This was much more aggressive than what markets were expecting. Governor Orr later explained that they cannot wait for uncertainty to move on policy as they have a lot of work to do to get back to the neutral rate of 2.0%. When asked about Oct, the Governor said the meeting is live. Thus, with the upgraded rate path the med-term bullish outlook remains intact for the NZD. A week after their meeting we also had very hawkish comments from RBNZ’s Hawkesby who stated that the bank’s decision not to hike rates was mostly about optics and not due to risks, and also explained that the bank contemplated hiking rates by 50 basis points. This just confirmed the bank’s hawkish pivot and places them miles ahead any other major central banks. The announcement two weeks ago about the RBNZ moving forward with tightening LVR restrictions to curb speculation in the housing market was interesting from a timing point of view. Usually, these type of macroprudential policies takes pressure of the central bank to reign in speculation with higher rates. The announcement has already seen some repricing for October with markets now pricing in a 25-basis point hike instead of a 50-basis point hike for this week’s upcoming meeting on Wednesday.
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 AUD 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 +2144 with a net non-commercial position of +10246. This week saw some decent unwind in net-long positions for leveraged funds (fast money) which can also explain some of the oversized downside in the NZD during the past week. With the overall optimistic rate path from the RBNZ, the bias for the currency remains unchanged, and with small net-long positioning the current spot levels for the NZD still looks attractive for med-term buyers but waiting for the RBNZ is a prudent move.
USD
FUNDAMENTAL BIAS: WEAK BULLISH
1. The Monetary Policy outlook for the FED
More hawkish than expected sums up the Sep meeting. The FOMC gave the go ahead for a November tapering announcement as long as the economy develops as expected with their criteria for substantial further progress close to being met. The biggest hawkish tilt was the announcement about a faster pace of tapering, with Chair Powell saying there is broad agreement that tapering can be concluded by mid2022. Inflation projections were hawkish, with the Fed projecting Core PCE above their 2% until 2024. On labour, Chair Powell said he thought the substantial further progress threshold for employment was ‘all but met’ and explained that it won’t take a very strong September jobs print for them to start tapering as just a ‘decent’ print will do. The 2022 Dots stayed very close to the June median, but the rate path was much steeper than markets were anticipating with seven hikes expected over the forecast horizon (from just two previously). It is important here to note though that even though the path was steeper, if one compares that to a projected Core PCE >2% for 2022 to 2024, the rate path does not exactly scream fear when it comes to inflation . All in all, it was a hawkish meeting. Interestingly, it took markets about three days to realize this as the expected price action only really took hold of markets a few days later. A faster tapering was a key factor we were watching for an incrementally bullish tilt in the outlook, so market’s initial reactions were surprising. However, with the recent breakout in both US yields and the USD, this has given us more confidence in moving our fundamental outlook for the Dollar from Neutral to Weak Bullish .
2. Real Yields
With a Q4 taper start and mid-2022 taper conclusion on the card, we think further downside in real yields will be a struggle and the probability are skewed higher given the outlook for growth, inflation and policy, and higher real yields should be supportive for the USD in the med-term .
3. The global risk outlook
One supporting factor for the USD from June was the onset of downside surprises in global growth. However, recent Covid-19 case data from ourworldindata. org has shown a sharp deceleration in new cases globally. Using past occurrences as a template, the reduction in cases is likely to lead to less restrictive measures, which is likely to lead to a strong bounce in economic activity. Thus, even though we have shifted our bias to weak bullish in the med-term , the fall in cases and increased likelihood of a bounce in economic activity could mean downside for the USD from a short to intermediate time horizon (remember a re-acceleration in growth and potentially inflation = reflation)
4. CFTC Analysis
Latest CFTC data showed a positioning change of +1361 with a net non-commercial position of +26461. Positioning isn’t anywhere near stress levels for the USD, but with both large speculators and leveraged funds sitting in net-long territory, it does mean that the Dollar could be more sensitive from mean reversion while still elevated after the recent push higher into new YTD highs.
5. Economic Data
This week we’ll finally have the September NFP print, but all the previous excitement about this event has been mitigated with the Fed’s previous meeting. The Fed’s comments that they don’t need to see a huge or stellar jobs print but that a decent print will do, has largely taken the sting out of the Sep NFP print. The current concerns about inflation means that the Average Hourly Earnings release could be of more interest for market participants to see whether the current labour supply shortage sparks further acceleration in wages.