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NZD: Hurdle to push on up from here - BNZ

According to Jason Wong, Senior Markets Strategist at BNZ, last week was fairly uneventful, given the dearth of global economic data and lack of newsflow as the NZD ended the week a smidgeon higher against the USD and AUD but all the key NZD crosses didn’t change by more than 0.5% for the week.  But beneath the surface there are some interesting dynamics in play which we are keeping our eye on, he further adds.

Key Quotes

“Risk appetite remains high, but has shown signs of slipping, particularly over the past couple of weeks, as high-yield and emerging market credit spreads blow out, while the VIX index has nudged up from recent lows. Our risk appetite index sits at a 2-month low of 76%, down from as high as 85% just a few weeks ago.  A reduction in risk appetite back to a more normal level represents a key downside risk factor for the NZD.”

“And while strong global economic momentum has driven global commodity prices higher, dairy prices are falling for idiosyncratic reasons, largely owing to increasing supply conditions.  The last three GDT dairy auctions have shown falling prices, taking the cumulative reduction in average prices to 7%. Further downside is possible and an upturn seems unlikely until well into next year.”

“On a more positive note the domestic political risk premium built into the NZD since the formation of the new government appears to be fading.  Acting Governor Spencer should have allayed those with fears that proposed changes to the RBNZ Act would significantly change the course of monetary policy.  Spencer noted that moving to a dual mandate was unlikely to impact monetary policy as the Bank already considers itself a “flexible” inflation targeter, already taking into account employment dynamics. This supports our view that the Bank’s reaction function will be little changed after the legislation is passed, with a target date of before the end of March 2018.”

“Last week’s RBNZ MPS was in line with our expectations, providing some mild support for the NZD.  Spencer noted that the NZD was closer to a sustainable level, in the vicinity of fair value, and this was backed up by the Bank projecting a flat TWI at 73.5.  It was a refreshingly honest assessment and something we agree with when seen in a medium-term context.  That the NZD didn’t rally hard after this comment suggests that traders aren’t really in a mood to push the NZD a lot higher, perhaps a reflection of the global backdrop, with commodity currencies not favoured at present.  It suggests a hurdle for the NZD to push on up from here.”

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