NZD should be well supported - BNZ

Jason Wong, Currency Strategist at BNZ, suggests that the RBNZ’s MPS this Thursday will be the key focus for the NZD ahead and they think that the RBNZ’s neutral policy tone has been successful in containing rates and the NZD.

Key Quotes

 “NZD/USD reached its lowest level in 11 months last week, touching 0.6840, although it ended the week on a slightly healthier note, back above 0.69. Last week, the NZD was dragged down along with weaker global commodity prices and other commodity currencies. Of some consolation was that traders recognised that NZ’s soft commodity basket is performing much better compared to Australia’s hard commodity basket. NZD/AUD recovered 1.7% for the week to 0.9320.”

“The 0.6840-0.6890 zone proved to be the low point back in December and March and represents an area of strong technical support. For NZD/AUD the 0.91-0.9150 area has recently proven to be technically supportive.”

“The gap between NZD spot and our short-term fair value estimate of just above USD 0.74 remains historically wide, at around 7%. In the context of positive risk sentiment and near-record NZ terms of trade, fundamentally we think that the NZD should be well supported. Overlay that with the technical picture, and the fact that the hot money is short NZD, there is a fairly low hurdle rate for the NZD to make some recovery over coming weeks and months.”

“The RBNZ’s MPS this Thursday will be the key focus for the NZD ahead. We think that the RBNZ’s neutral policy tone has been successful in containing rates and the NZD. The Bank’s prevailing view is that there is an equal chance of an OCR cut or hike and any policy adjustment is expected to be far into the future, around late 2019.”

“That guidance looks likely to change, as inflation has significantly surprised the RBNZ to the upside and the weaker-than-expected NZD adds further upside to the RBNZ’s inflation projections. The Bank is unlikely to embrace the market’s view that a rate hike could come as soon as early next year, but incrementally through the year we see the Bank changing its tune towards a more hawkish tone. We see this week’s Statement as a step in that direction.”

“Overall, the Bank will want to be careful in not endorsing or even come close to accepting the current market view of rate hikes from early next year. The Bank will likely continue to have a much more sanguine view on the inflation and the rates outlook. But a bringing forward of projected rate hikes and softened rhetoric on the currency, might be enough to provide some support to the NZD.”