NZD: Negative bias - ANZ

Analysts at ANZ continue to favour fading strength in the NZD, while valuations are providing neutral signals, the yield advantage is closing, the global liquidity cycle has peaked, and New Zealand’s domestic credentials are solid, but no longer a standout. That’s a combination that makes higher highs difficult to achieve, they further add.

Key Quotes

“We retain a negative bias towards the NZD. Key reasons include:

• NZD positioning remains extremely long and USD positioning is extremely short.
• New Zealand’s relative economic position is slipping as the cycle matures and momentum picks up elsewhere. 
• We continue to expect an imminent turn in the global liquidity cycle, which will present challenges for risk currencies/assets. Abundant official and market liquidity (driven by low risk aversion) has been a key source of support for peripheral currencies. This cycle has peaked with central banks inching closer to the exit door. 
• US economic data is stabilising, making it more difficult to be overly bearish the greenback.
• The narrowing of NZ-US interest rate differentials is hard to ignore. A meagre 62bps separates 3mth rates; the gap was 350bps less than 3 years ago.”

“While valuations are giving neutral signals, and we are mindful of lingering USD “resentment”, the above combination leaves us wary of chasing higher highs for the NZD/USD.”

“We expect the RBNZ to reinforce its aggressively neutral bias at the upcoming MPS. With growth below trend and core inflation pressures sub 2%, there is a case for moving to an easing bias. We think that is a bridge too far, but the flavour of the communication will have a tilt to the dovish side. That’s a backdrop that should also act as a cap on the NZD.”