Assessment after NZD surge
We were stopped out of our short CAD/NZD position today on the rise in the pair through 0.8623.
The principal cause is the rebound in the NZD following a stronger than expected GDP report yesterday.
In the global risk-on rebound this week, the NZD may have been playing catch-up. The NZ data trend has been weaker than expected and the market may have been clinging to a negative outlook for the NZD, but gave up after the GDP report.
The GDP outcome for Q2 was strong after three-quarters of lacklustre growth. The data alone might suggest the RBNZ will stay with a steady rates policy for some time, anticipating that the next move in rates will be higher.
However, as we have discussed, the business and consumer survey data has been consistently softer this year and point to a weaker second half economy, and below trend growth through the year, raising the risks that the RBNZ will cut rates at some stage, potentially before year end.
Milk futures prices are also weaker, so we continue to expect under-performance in the NZD, and its rebound may be an opportunity to sell.
The issue is finding the right candidate to sell NZD against.
We are not inclined to jump back into the CAD at this time; while we see a NAFTA trade deal as likely, this outcome may now be factored into CAD to a significant extent, and a no deal could have a large negative impact on the CAD.
Furthermore, CPI and retail sales data out in Canada tomorrow may cause significant moves in CAD that are hard to predict.
The USD is under pressure broadly this week. We are not confident that it will reverse direction quickly. Sentiment may have swung back to EM markets in the near term based largely on the idea that they are good value after their wide under-performance of USD assets in recent months.
The market may see mid-term election risk as negative for the USD, or worry about a negative backlash from tariff wars on US business and consumer confidence. There is a tendency for the market to look for a peak in US rates and worry about twin deficits over recent years.
As we have discussed in the past, the choppy performance in the USD in recent years may reflect a battle between short-term positive cyclical strength vs long-term structural weakness.
Perhaps we could buy EUR that appears to have made a significant break higher out of its recent range. This might be a viable trade. The Italian government appears set to stay within EU budget guidelines. European equities and credit risk metrics have improved significantly.
However, Eurozone economic and inflation data have disappointed expectations of a rebound, so it hard to see a strong fundamental case for its continued advance.
Perhaps buying a Scandi currency is a thought. SEK and NOK are showing strength as the market gears up for rate hikes expected relatively soon. However, trading NZD vs Scandis seems kind of funky, spreads and slippage may be hard to manage. My level of expertise with Scandi’s is low.
Selling NZD vs JPY is not unthinkable. Japanese economic reports are showing strength. Japanese equities are performing well recently with a number of commentators noting strong profit growth in Japan. Abe has won a vote for LDP party leader removing political uncertainty.
NZD/JPY has risen significantly and may be approaching technical resistance; it would be a somewhat contrary trade
The risk is that JPY remains soft as US yields rise and risk-on trading attracts sales of JPY. On the other hand, JPY has had a limited correlation with any one factor in the last year, so we do not sense that it will fall much even if yields and global equities rise.
AUD/NZD is a go-to pair to reflect fundamental domestic conditions between the two. Buying AUD/NZD may work, the rates and commodity spreads suggest it can trade higher. Technically these are also good levels to buy, near the bottom of its range, and possibly an uptrend.
The issue I have with AUD is the weak housing market, legal issues facing banks that may make them tighten credit conditions further, and the increasing political uncertainty. The risk posed by tariffs appears to have decreased for now, but may come back at some stage.
After a few trades in a row that have gone bad, I feel that I need to be patient and wait for a better opportunities.
The RBNZ statement is next Thursday. It is between MPS, so the safe bet for the RBNZ is to leave its messages unchanged, so it should not affect the NZD. The ANZ business confidence data on Wednesday may be important. If it continues to languish at recent lows, then concerns for weaker growth should build. On the other hand, a rebound could contribute to a further squeeze higher in the NZD.