NZD Corporate FX Update
Through 2018 so far, the NZD has met some resistance around 0.7440, with weaker risk appetite recently driving the NZD back down to 0.72, in line with our end-Q1 and Q2 targets set earlier this year. Trade protectionism has reared its ugly head again, following President Trump’s imposition of import tariffs on various products including steel and aluminium. This theme is likely to continue into the second quarter, with Trump targeting a $100bn reduction in the US trade deficit with China. We have yet to see other countries retaliate, but if Trump continues down this path then some backlash seems inevitable. However, we still don’t think that a full-on global trade war is likely and we see the real economic impact of what we would call tweaks to trade policy as limited.
NZD/JPY: The Case For Further Downward Pressure
Earlier this year (see NZD Corporate FX Update) we turned more bullish on the yen, revising our NZD/JPY forecasts significantly lower to show a trend decline in the cross through the next few years, taking it to 68 by the end of 2020. Since then we’ve already seen a 3-4% move lower in the cross from 80 to 77, moving down at a faster pace than projected (which is not unusual when it comes to currency forecasting!). In this note we flesh out our positive yen story.
Can the NZD weaken as the USD weakens?
In our last major note towards the end of January “Weak USD Threatens Our NZD Call”, the USD TWI had just fallen for the seventh consecutive week, the NZD had breached the USD 0.74 mark and we wondered aloud how much longer this could continue. As it turns out, the freefall in the USD has stopped, with the currency entering a period of consolidation. This has seen the NZD held largely within a USD 0.72-0.74 trading range over recent weeks.
NZD Corporate FX Update
The year has begun with bearish sentiment overhanging the USD which saw the NZD push up to fresh highs above 0.74. We have recently been fretting about USD weakness and wondering how much longer this would be sustained. But currency markets are now at an interesting crossroads. A chunky increase in US Treasury yields has spooked markets. A much higher VIX index and wider credit spreads has seen our risk appetite index plunge from 85% to 70%, giving a taste of what might be in store for 2018, namely increased market volatility. A question mark hangs over whether the USD will continue to lurch downwards.
Weak USD Threatens Our NZD Call
In our opening currency piece for the year, “NZD Review and Outlook” we touched on a few themes including the weak USD story. We expand on this theme and the implications for the NZD.
NZD Review and Outlook
The NZD underperformed last year, falling by 4.3% on a TWI basis and falling against 12 of the 17 currencies that make up the TWI basket. Of the key majors, the NZD only rose against the USD (+2%), with falls against EUR ( 10%), GBP (-6%), AUD (-5½%), CAD, (-4%), CNY (-4%) and JPY (-1%).