NZD
FUNDAMENTAL BIAS: BULLISH
1. Developments surrounding the global risk outlook.
As a high-beta currency, NZD has benefited from the market's improving risk outlook over recent months as participants moved out of safehavens and into riskier, higher-yielding assets. As a pro-cyclical currency, the NZD enjoyed upside alongside other cyclical assets going into what majority of market participants think was an early post-recession recovery phase. As long as 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 the recent short-term jitters and risk off flows once again showed us why risk sentiment is also a very important short-term driver for the currency.
2. The Monetary Policy outlook for the RBNZ
New Zealand’s Zero Covid strategy caused quite the rigmarole for the NZD this week as market participants were forced to unwind some of their very aggressive expectations for rate hikes going into the meeting. The unwind was so aggressive that OIS prices dropped from a 100% chance of a hike to just above 50% at some stage. The RBNZ chose to leave rates unchanged, but despite the virus escalation they offered a much more optimistic tone compared to their prior meeting by updating their rate path projections to show 7 projected hikes between Dec 2021 and H1 2023 (bringing the OCR to 2.0%). This was even more aggressive than the already aggressive bets heading into the meeting before the covid news hit the wires. The Governor also later explained that they need to continue to move on policy and cannot wait for uncertainty as they have a lot of work to do to get back to the neutral rate of 2.0%. Also, when asked about Oct Governor Orr said the meeting is live, but also acknowledged that they’ve made it very clear their next move is likely a hike so they can afford to wait. Thus, with the upgraded rate path the med-term bullish outlook remains intact for the NZD.
3. The country’s economic and health developments
The main focus right now will be on how quickly the New Zealand government can get the virus situation under control. We’ve already heard some good news on Thursday reporting that the government has been able to trace the source of the Delta case and should be able to get the situation under control. This will be a key factor to watch for the NZD in the next few sessions.
4. CFTC Analysis
Latest CFTC data for the NZD (updated until 17 August) showed a positioning change of 797 with a net non-commercial position of -235. It’s important to keep in mind the data will not reflect the big flush lower in the NZD we saw after the virus situation caused market participants to dial down their aggressive hike expectations for the RBNZ. With the overall optimistic rate path the bias for the currency remains unchanged, and with positioning at neutral the current spot levels for the NZD still looks attractive.
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.
3. CFTC Analysis
Latest CFTC data for the JPY (updated until 17 August) showed a positioning change of -2551 with a net non-commercial position of -63208. The big net-short created some additional momentum to the upside for the JPY this week as risk sentiment soured and demand for safe havens rose. With positioning still the largest net-short among the majors we want to be very careful of the risks going into the Jackson Hole symposium next week. If the symposium doesn’t provide any hints of tapering though it could open up some opportunities in the battered currency pairs like NZDJPY and CADJPY etc.
FUNDAMENTAL BIAS: BULLISH
1. Developments surrounding the global risk outlook.
As a high-beta currency, NZD has benefited from the market's improving risk outlook over recent months as participants moved out of safehavens and into riskier, higher-yielding assets. As a pro-cyclical currency, the NZD enjoyed upside alongside other cyclical assets going into what majority of market participants think was an early post-recession recovery phase. As long as 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 the recent short-term jitters and risk off flows once again showed us why risk sentiment is also a very important short-term driver for the currency.
2. The Monetary Policy outlook for the RBNZ
New Zealand’s Zero Covid strategy caused quite the rigmarole for the NZD this week as market participants were forced to unwind some of their very aggressive expectations for rate hikes going into the meeting. The unwind was so aggressive that OIS prices dropped from a 100% chance of a hike to just above 50% at some stage. The RBNZ chose to leave rates unchanged, but despite the virus escalation they offered a much more optimistic tone compared to their prior meeting by updating their rate path projections to show 7 projected hikes between Dec 2021 and H1 2023 (bringing the OCR to 2.0%). This was even more aggressive than the already aggressive bets heading into the meeting before the covid news hit the wires. The Governor also later explained that they need to continue to move on policy and cannot wait for uncertainty as they have a lot of work to do to get back to the neutral rate of 2.0%. Also, when asked about Oct Governor Orr said the meeting is live, but also acknowledged that they’ve made it very clear their next move is likely a hike so they can afford to wait. Thus, with the upgraded rate path the med-term bullish outlook remains intact for the NZD.
3. The country’s economic and health developments
The main focus right now will be on how quickly the New Zealand government can get the virus situation under control. We’ve already heard some good news on Thursday reporting that the government has been able to trace the source of the Delta case and should be able to get the situation under control. This will be a key factor to watch for the NZD in the next few sessions.
4. CFTC Analysis
Latest CFTC data for the NZD (updated until 17 August) showed a positioning change of 797 with a net non-commercial position of -235. It’s important to keep in mind the data will not reflect the big flush lower in the NZD we saw after the virus situation caused market participants to dial down their aggressive hike expectations for the RBNZ. With the overall optimistic rate path the bias for the currency remains unchanged, and with positioning at neutral the current spot levels for the NZD still looks attractive.
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.
3. CFTC Analysis
Latest CFTC data for the JPY (updated until 17 August) showed a positioning change of -2551 with a net non-commercial position of -63208. The big net-short created some additional momentum to the upside for the JPY this week as risk sentiment soured and demand for safe havens rose. With positioning still the largest net-short among the majors we want to be very careful of the risks going into the Jackson Hole symposium next week. If the symposium doesn’t provide any hints of tapering though it could open up some opportunities in the battered currency pairs like NZDJPY and CADJPY etc.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.