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Interest rates: the ugly dilemma facing Europe’s central banks – and why it’s a mistake to cut too soon 
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Bank of England interest rate rise: why this could be the last increase for a while 
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Inflation: raising interest rates was never the right medicine 
Why the Bank of England is now more upbeat than the IMF 
The current prices of NZDCAD hold stronger at supports of 0.9307 despite gravestone doji, upswings likely to drag further but the stiff resistance seen at 0.9517 levels. On a broader perspective, the triple top formation on monthly charts is spotted out, but it puzzles with a non-directional trend with reducing volumes on rising prices.
As we’ve seen a sense of strength again to the Canadian dollar in the recent past especially cushioned by crude price but long term sustenance is still highly dubious.
New Zealand continues to suffer from disinflationary pressures, with reported CPI inflation well below the RBNZ’s 1-3% target range. It is also more exposed to China growth risks than Canada.
Consequently, the market pricing for a 25bp OCR cut to 1.75% by 10 November implies an 80% chance, lower than the 98% priced in a week ago. There are two reasons for this decline: first, the RBNZ has communicated that it prefers to move on MPS dates, which means September can be ruled out; there will be a lot of fresh information between now and November which could sway the RBNZ either way.
Our view is that a Nov cut is highly likely. The second reason is that US rates have risen amid hawkish Fed speak during the past week. Yellen’s speech on Friday has the potential to confirm that hawkishness, which means pricing for a December hike could rise from the currently fence-sitting 50%.
On valuation terms, NZD remains overvalued, while milk powder prices have stayed depressed and inflation in New Zealand has surprised to the downside. The OCR is likely to be cut to 1.75% in November.
NZD TWI strength is a major concern, together with downside risks to global growth. But TWI strength is not solely yield driven. Growth matters too and lowers interest rates are stimulating growth.
On the flip side, the Canadian dollar offers better value, and should continue to benefit from more stable crude oil prices and the US economic recovery.
In addition to that, the Kiwi has a very export-driven competitive economy with exports accounting for about 30% of GDP.
Most notably, China has been the major trade partner of Kiwis, China overtook the United States at the end of 2008 to become New Zealand's second-largest trading partner, with bilateral trade amounting to $12.7 billion in the year ended September 2011.
Chinese demand for New Zealand commodity exports, especially dairy products, and logs, has risen rapidly in recent times and has been the major factor in the recent surge in New Zealand's commodity prices and terms of trade.
Thus, for now, amid short-term bullish speculative trades the recommendation for medium-term perspective is that stay short NZDCAD is a relative value trade with low correlation to global market trends. Maintain shorts either through mid-month futures or options spreads.
