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.
We continue our series on the NZD crosses, this time looking at NZD/JPY.
- The cross is currently close to its average of the past year and near the middle of the 72-79 trading range.
- Our projections this year suggest more of the same – around the mid-70s – but this cross is apt to swing around due to its sensitivity to risk appetite.
- BoJ policy is suppressing the yen and this is likely to continue, but policy easing has reached practical limits.
- Given the yen’s cheapness, on a medium-term view our forecasts are biased to the downside.
NZD Corporate FX Update
The NZD is currently fairly priced at 0.68 and we still see the NZD anchored about 0.67-0.70 this year, with brief excursions outside that range. Downside risks include weaker than expected global growth, led by China and Europe. An assumed thawing of US-China trade tensions and strong NZ terms of trade are supporting factors.
This is the third chart-pack in our series looking at NZD cross rates. NZD/AUD and NZD/CAD chartpacks were published 29 January.
• The cross is currently near the middle of its 5-year trading range.
• On a multi-year view, we see more downside than upside pressure.
• We don’t have strong conviction on the near-term outlook, with oil prices likely to be a key swing factor. Relative commodity prices are a much more important driver than interest rate differentials.
• Our forecasts show the cross spending more time in a 0.85-0.90 range than 0.90-0.95 range this year.
• NZD/AUD trades near the top end of its 5-year trading range, slightly above our LT and ST fair value estimates.
• We see this as justified, given some of the current negative forces that weigh on Australia, such as concerns about its housing market and closer ties to a slowing Chinese economy.
• We see the higher trading range for the cross being sustained through 1H19, with projections consistent with a 0.93-0.98 trading range, before the cross reverses course later in the year.
NZD Review and 2019 Outlook
The NZD showed mixed performance through 2018, weakening against the USD and JPY and outperforming the other key commodity currencies, AUD and CAD. Performance of the NZD on EUR, GBP, and CNY crosses depends on measurement. Taking the spot rate as at the end of 2018 and 2017, the NZD showed little movement. Using December month averages, the NZD ended up stronger on these crosses.