FxWirePro: Day of FED and RBNZ – NZD/USD valuations, projections and hedging perspectives

Today’s prime focus is on the US FED and RBNZ’s monetary policy announcements. The US dollar should strengthen further if the Fed hints on further hikes this year, and that will nudge Kiwis dollar lower. While the RBNZ took another step down the dovish path in the August Monetary Policy Statement, opening the door further to a rate cut scenario. The dovish signal from the RBNZ’s August MPS should resonate during the months ahead. 

We foresee a reasonable chance of a rate cut from the RBNZ (approx. 30%), it seems likely that this is a prospect for 2019, and would require a further loss of momentum in the activity data. The RBNZ laid out a clear path to a rate cut at the August MPS, which required that growth fails to stabilize over 2Q/3Q. Recent tracking data suggest that growth will in fact beat the RBNZ’s low-ball forecast in 2Q (RBNZ 0.5% q/q), as retail volumes surged over the quarter.

On flip side, we expect the Fed to hike the target range to 2.00-2.25%, but not send any new policy signals. With respect to Fed projections, it will most likely still signal another hike in December (and probably that more FOMC members support this) and three hikes next year (it was divided between two or three additional hikes next year and it would take four members to move it higher).

The Fed will also still signal that it is going to raise the Fed funds rate above the longer-run rate. The longer-run rate may be revised higher to 3.00%. It seems on track to deliver two more hikes this year (next week and in December). Growth is strong, optimism is high, the unemployment rate is low, wage growth is increasing (although at a gradual pace) and core inflation is running near the 2% target. We believe it will be more 'stop and go' for the Fed when the funds rate has reached neutral (2.75-3.00% range), which we believe is likely to happen in March 2019.

NZDUSD is projected to end 3Q’19 at 0.61 (previous 2Q target 0.62). Much as the global growth and reflation impulse has faded this year, the reality is that there have been important domestic drivers of NZD’s slide too. 

NZD is our preferred high-beta short within G10 at present as it’s the only DM economy where the market prices a realistic chance of rate cuts over the coming year (around 10bp is priced by mid-19). 

NZD is no longer expensive in outright terms (the REER is in line with a long-term average), that being said it is quite a bit more expensive than large parts of EM yet vulnerable to the same pressure from tighter US monetary policy with the additional kicker of course that NZD is now negative carry.

Contemplating all these driving forces, on hedging grounds, we advocate shorting NZDUSDfutures contracts of mid-month tenors as the underlying spot FX likely to target southwards 0.6450 levels in the medium run. Writers in a futures contract are expected to maintain margins in order to open and maintain a short futures position. Courtesy: Danske, JPM

Currency Strength Index: FxWirePro's hourly NZD spot index is flashing at -2 levels (which is neutral), while hourly USD spot index was at 83 (bullish) while articulating at (08:17 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex