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NZD: Short as RBNZ likely to heighten 'jawboning' - Nomura

FXStreet (Bali) - A stronger NZD on a TWI basis means that RBNZ could heighten its overvaluation rhetoric, notes Charles St-Arnaud, FX Strategist at Nomura.

Key Quotes

"NZD depreciated significantly following the 24 September comments from RBNZ Governor Wheeler that the central bank considered NZD to be „unjustified and unsustainable‟ and made it clear that the RBNZ was ready to step in and intervene in the FX market to weaken NZD."

"Since then, NZD/USD has depreciated by about 2.5%, even reaching 4.8% of depreciation at one point. However, on a trade-weighted basis, NZD is currently about 0.4% higher than it was when Governor Wheeler commented on the exchange rate and FX interventions."

"The RBNZ prefers to refer to the trade-weighted index when discussing the exchange rate. By this measure, NZD is back to the same level it was when the RBNZ warned about interventions, despite having depreciated by 3.5% initially."

"Part of the NZD appreciation can be attributed to JPY depreciation (5.8%), but not all of it. NZD is stronger than pre-RBNZ comments against EUR (0.4%), AUD (0.3%) and GBP (1.6%). With the RBNZ focusing mainly on the TWI rather than on the NZD/USD cross for its FX policy, we believe that, given the comeback in NZD, the RBNZ is likely to heighten its rhetoric for a weaker currency."

"This will likely come at the next RBNZ meeting on 12 December and at Governor Wheeler‟s press conference. Moreover, the report on FX interventions, to be published 27 November, could show further NZD selling by the central bank."

"With these risk events ahead and considering the current level of NZD, we believe that the risks to NZD are skewed to the downside over the next few weeks. Moreover, commodity prices relevant to New Zealand continue to decline, albeit at a slower pace. This is in line with our forecast of further NZD depreciation going into year-end, with NZD/USD expected to reach 0.75."

"As a result, we recommend going short NZD via an equally weighted basket composed of USD, AUD and MXN investing $10m total, with a stop loss of 2% and a target profit of 3%."

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