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Stay short NZD/USD ahead of RBNZ – Deutsche Bank

FXStreet (Delhi) – Robin Winkler, Strategist at Deutsche Bank, suggests that the market under-prices the odds of an OCR cut is at only 12% and net long positioning also guards against a squeeze. So, there is good risk reward in staying short NZD/USD, the analyst adds.

Key Quotes

“RBNZ needs weaker kiwi for tradables inflation. The September MPS assumption that “the exchange rate remain low, boosting tradables inflation” hinged on the TWI ending Q3 at 70.0 and Q4 at 67.9. Current levels above 73 thus jeopardize the RBNZ’s tradables inflation projections. To be sure, with only 3bps of easing priced, dovish rhetoric would permit the RBNZ to contain a squeeze if they held. Most obviously, the statement could deem further depreciation ‘necessary’, not just ‘appropriate’. That said, the current easing bias leaves no scope to talk the kiwi down, and the RBNZ would need to rely on external factors to push the TWI back to levels consistent with their inflation projections. Yet these factors look unfavourable, with the Fed frozen by uncertainty, the ECB and BoJ likely to ease more by year-end, and the PBoC getting ahead of the curve. The RBNZ thus has good reasons not to wait until December.”

“Dairy prices may fail to boost non-tradables inflation. The other main MPS assumption was that “export prices have troughed” and would recover gradually. The recent recovery in dairy prices is at best consistent with this. Although prices have rebounded from the August lows, the recent decline in auction prices and futures suggests that prices have overshot what little fundamental adjustment there has been. The RBNZ will also be aware that higher prices have come at the expense of lower volumes and are no free lunch for dairy farmers. Policy-makers thus have little reason to be more optimistic on non-tradables inflation than last month, when they penciled in another rate cut. The flat Q3 print was disappointing.”

“Rates pricing and positioning cap the upside. With the market having pared net shorts and unlikely to build substantive net longs, the kiwi is unlikely to squeeze materially with a dovish hold. Hence, even if a hold is marginally more likely than a cut, the compelling rationale for the RBNZ to kitchen-sink the exchange rate in a surprise move offers good risk-reward for sticking with strategic NZD/USD shorts.”

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