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RBNZ is due to release its monetary policy statement tomorrow, wherein it announces OCR rates which is likely to remain on hold. This is going to be the last monetary policy proclamation for the governor, Wheeler in this tenure who has served since September 2012.
Kiwis central bank executives keen onto express desire for a lower currency value. The outgoing Governor stated last week that he “… would have preferred a lower exchange rate” through his term, but caveated this with the comment that “… to a large extent the high exchange rate reflects the favourable performance of the economy, high terms of trade, and weakness in the US dollar.” These comments don’t display much anxiety, but he at least repeated the OCR mantra that “… a lower NZD is needed.
We expect NZD to fall over the next 12 months, as growth will likely continue to underperform the RBNZ’s lofty forecasts (refer above chart), housing slows (refer above chart), and as tight financial conditions restrain any requirement for OCR hikes, allowing rate compression vs USD.
We are also of the view that while systematic/model-based investors might struggle to sell NZD given where the terms of trade are, this is only an anchor for valuations to the extent it predicts growth, inflation, or the current account. On these fronts, we see the details as being less bullish than they appear.
We continue to look for a lower NZD over the coming year, as tight financial conditions, weaker growth, a housing market that has peaked and a policy rate more likely to go down than up in the next year all weigh on the Kiwi. A combination of weaker data and uncertainty ahead of the general election has driven a decent position adjustment in NZD of late (refer above chart), thus, Q4’17 forecasts would be at around - 0.70 and Q2’18 target is at 0.66. Courtesy: JPM
Trade recommendation: Contemplating above aspects, relative-value trades are advised that gives arbitrage investment opportunity that seeks to take advantage of price differentials between FX rates.
Buy NZDUSD straddles of far-month tenors vs shorting AUDUSD 25D strangle, 100:150 vega.
