NZD Corporate FX Update
The NZD remains stuck in a 0.6650-0.6950 trading range, which is expected to continue over coming months. As the year progresses, we expect a more positive tone to the global economic backdrop to prevail – a factor which the NZD is sensitive to – supporting a move to 0.70 by year-end.
NZD: Conflicting Forces
The run of global economic data has been softer, the US yield curve turned negative adding to fears of economic recession, the Fed has done a U-turn on its policy outlook, and other central banks have raised concern about the external outlook. Meanwhile, credit spreads remain tight, commodity prices trend higher and the NZD seems to have good support. These are conflicting forces. In this note we try to summarise what’s going on, with implications for the NZD.
NZD/AUD How much more upside?
• NZD/AUD has been tracking higher this year, as expected, and reached a fresh closing high mid last week above 0.97.
• The cross rate is in an overshooting phase relative to current economic fundamentals, based on concern that the Australian economy is on a much weaker trajectory, driven by the housing market. This is reflected in short positioning in AUD, with the market anticipating that bad news for Australia relative to NZ will continue.
• At this juncture the risk is that the top of our suggested trading range for 1H19 (0.98) is breached. The best chance for this to happen would be the run of data continuing to be on the soft side for Australia, alongside a building political risk premium closer to the Federal election. The opposing view is that a shift in data momentum occurs – stronger Australian data imposing some doubt on RBA rate cuts and encouraging a closing of short AUD positions; or weaker NZ data fuelling RBNZ cut expectations.
This is the last in our series of chartpacks on the NZD cross rates following previous notes on NZD vs AUD, CAD, GBP and JPY over the past two months.