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NZD CHF - FUNDAMENTAL DRIVERSNZD FUNDAMENTAL BIAS: BULLISH 1. The Monetary Policy outlook for the RBNZ At their Oct meeting, the RBNZ delivered on expectations to raise the OCR to 0.50%. As the hike was already fully priced, the lack of new hawkish tones we saw a textbook buy-the-rumour-sell-the-fact reaction in the NZD pushing lower. There was additional focus on the RBNZ expecting headline CPI to climb above 4 percent in the near term, but the most important part of the statement was the subsequent comment that the bank still sees CPI returning towards the 2 percent midpoint over the medium 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 August meeting. Unsurprisingly, the bank also stated that their future rate path is contingent on the medium-term 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, and as rates keeps rising, 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. Economic and health developments Friday’s price action was once again a good example what an impact rising virus cases can still have on sentiment. The NZD was an underperformer on Friday as virus cases reached new record highs. If cases continue to climb, it will most likely lead to more restrictive measures, which could dent the market’s rate expectations from the RBNZ, so one to watch closely in the sessions to come. 4. CFTC Analysis Latest CFTC data showed a positioning change of -2308 with a net non-commercial position of +6440. The NZD reflects net-long positioning for both large speculators as well as leveraged funds but are nowhere near stress levels right now. With the NZD now sitting on the highest cash rate among the major economies and with expectations of that to continue to rise we think carry attractiveness will become a key focus point for the NZD in the months ahead and should mean a favourable upside bias for the NZD against the low yielders like JPY and CHF. In the short- term though, as we mentioned above, the virus situation could see some of the recent upside given back. 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 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 -4612 with a net non-commercial position of -17584. 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. With the EURCHF pair treading water around the 1.07 level, UBS believes the pair is already in intervention territory for the SNB and also thinks fading any further downside in the pair as opportunities to lean into longs.
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NZD USD - FUNDAMENTAL DRIVERSNZD FUNDAMENTAL BIAS: BULLISH 1. The Monetary Policy outlook for the RBNZ At their Oct meeting, the RBNZ delivered on expectations to raise the OCR to 0.50%. As the hike was already fully priced, the lack of new hawkish tones we saw a textbook buy-the-rumour-sell-the-fact reaction in the NZD pushing lower. There was additional focus on the RBNZ expecting headline CPI to climb above 4 percent in the near term, but the most important part of the statement was the subsequent comment that the bank still sees CPI returning towards the 2 percent midpoint over the medium 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 August meeting. Unsurprisingly, the bank also stated that their future rate path is contingent on the medium-term 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, and as rates keeps rising, 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. Economic and health developments Friday’s price action was once again a good example what an impact rising virus cases can still have on sentiment. The NZD was an underperformer on Friday as virus cases reached new record highs. If cases continue to climb, it will most likely lead to more restrictive measures, which could dent the market’s rate expectations from the RBNZ, so one to watch closely in the sessions to come. 4. CFTC Analysis Latest CFTC data showed a positioning change of -2308 with a net non-commercial position of +6440. The NZD reflects net-long positioning for both large speculators as well as leveraged funds but are nowhere near stress levels right now. With the NZD now sitting on the highest cash rate among the major economies and with expectations of that to continue to rise we think carry attractiveness will become a key focus point for the NZD in the months ahead and should mean a favourable upside bias for the NZD against the low yielders like JPY and CHF. In the short- term though, as we mentioned above, the virus situation could see some of the recent upside given back. 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. Economic Data Economic data will be very light in the incoming week with the main highlights being PCE and Advanced GDP (old news). Also keep in mind that the Fed has largely reduced the impact of economic data going into the November FOMC meeting by already acknowledged a Nov taper and a possible mid-2022 conclusion. So, even though data will be important, it’s unlikely to sway the Fed from their tapering plans. 5. CFTC Analysis Latest CFTC data showed a positioning change of +872 with a net non-commercial position of +35934. Positioning isn’t anywhere near stress levels for the USD, but the speed of the build-up in large specular positioning measures over 2-standard deviation on a 1-year look back period. Thus, even though the med-term bias remains unchanged, it does mean the USD could be sensitive to mean reversion risks while still trading close to YTD highs. Thus, reflationary data and overall risk sentiment will be a key focus for the USD in the week ahead.
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NZD JPY - FUNDAMENTAL DRIVERSNZD FUNDAMENTAL BIAS: BULLISH 1. The Monetary Policy outlook for the RBNZ At their Oct meeting, the RBNZ delivered on expectations to raise the OCR to 0.50%. As the hike was already fully priced, the lack of new hawkish tones we saw a textbook buy-the-rumour-sell-the-fact reaction in the NZD pushing lower. There was additional focus on the RBNZ expecting headline CPI to climb above 4 percent in the near term, but the most important part of the statement was the subsequent comment that the bank still sees CPI returning towards the 2 percent midpoint over the medium 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 August meeting. Unsurprisingly, the bank also stated that their future rate path is contingent on the medium-term 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, and as rates keeps rising, 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. Economic and health developments Friday’s price action was once again a good example what an impact rising virus cases can still have on sentiment. The NZD was an underperformer on Friday as virus cases reached new record highs. If cases continue to climb, it will most likely lead to more restrictive measures, which could dent the market’s rate expectations from the RBNZ, so one to watch closely in the sessions to come. 4. CFTC Analysis Latest CFTC data showed a positioning change of -2308 with a net non-commercial position of +6440. The NZD reflects net-long positioning for both large speculators as well as leveraged funds but are nowhere near stress levels right now. With the NZD now sitting on the highest cash rate among the major economies and with expectations of that to continue to rise we think carry attractiveness will become a key focus point for the NZD in the months ahead and should mean a favourable upside bias for the NZD against the low yielders like JPY and CHF. In the short- term though, as we mentioned above, the virus situation could see some of the recent upside given back. JPY FUNDAMENTAL BIAS: BEARISH 1. Safe-haven status and overall risk outlook As a safe-haven currency, the market's risk outlook is the primary driver of JPY. Economic data rarely proves market moving; and although monetary policy expectations can prove highly market-moving in the short-term, safe-haven flows are typically the more dominant factor. The market's overall risk tone has improved considerably following the pandemic with good news about successful vaccinations, and ongoing monetary and fiscal policy support paved the way for markets to expect a robust global economic recovery. Of course, there remains many uncertainties and many countries are continuing to fight virus waves, but as a whole the outlook has kept on improving over the past couple of months, which would expect safe-haven demand to diminish and result in a bearish outlook for the JPY. 2. Low-yielding currency with inverse correlation to US10Y As a low yielding currency, the JPY usually shares an inverse correlation to strong moves in yield differentials, more specifically in strong moves in US10Y . However, like most correlations, the strength of the inverse correlation between the JPY and US10Y is not perfect and will ebb and flow depending on the type of market environment from a risk and cycle point of view. With bond yields looking a bit stretched at the current levels any decent mean reversion is expected to be supportive for the JPY, so it remains a key asset class to keep track. 3. CFTC Analysis Latest CFTC data showed a positioning change of -26100 with a net non-commercial position of -102734. The past few days of price action in the JPY was mostly driven by the excessive moves we saw in yields on the US side but was also exacerbated by risk on flows and rising oil prices which is a negative driver for Japan for its terms of trade. Even though the bias for the JPY remains firmly tilted to the downside, the move is looking stretched, and with both large speculators and leveraged funds firmly in net-short territory the odds of some mean reversion has increased, and we would prefer waiting for some of the froth to mean revert before looking for new JPY shorts. As always, any major risk off flows can still support the JPY, especially with quite a sizable net-short position still built up in the currency for large speculators as well as leveraged funds, but rates have been the key driver in the short-term.
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Today’s Notable Sentiment ShiftsUSD – The dollar gained slightly on Monday as Treasury yields rose on expectations the Federal Reserve will need to hike interest rates sooner than previously expected to quell rising price pressures. GBP – Sterling steadied near a 20-month high versus the euro on Monday after BoE Governor Bailey said that the central bank would have to act on the risk of medium-term inflation, signaling that the central bank is gearing up to raise interest rates as inflation risks mount. NZD – The New Zealand dollar rose on Monday, as inflation jumped above expectations to a decade high, putting pressure on the central bank to accelerate its rate rising cycle, which sent bond yields surging. Indeed, JP Morgan notes that “We have expected the RBNZ to hike at the next two meetings and this result will keep them on track for that.”
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