9 Jun 2015
Don’t take profit on NZD/USD shorts ahead of RBNZ – DB
FXStreet (Barcelona) - Robin Winkler, Strategist at Deutsche Bank, suggests avoiding any profit-taking on NZD/USD ahead of the crucial RBNZ meeting, explaining the key reasons behind this view, and further maintaining a bearish target at 0.68.
Key Quotes
“First, the RBNZ’s primary rationale to cut is no longer to weaken the exchange rate but to ease domestic credit conditions. A weaker NZD may offer much-needed support for tradables inflation, but RBNZ staffers have acknowledged that they have primarily been too optimistic on non-tradables inflation in past forecasts.”
“Second, even if the RBNZ decided not to cut the OCR, the most ‘hawkish’ outcome from the review would be a firmer easing bias than the contingent one expressed in April. Lower inflation projections in the MPS would likely be coupled not only with dovish language around the exchange rate, as usual, but also a shifting of the contingency of a rate cut from weakening inflationary pressure to weak inflation not rising in line with projections by the next review on July 23, which is preceded by the release of the Q2 CPI on July 15. The RBNZ will be aware that a loss dovish statement would result in a painful squeeze in the exchange rate. As for core inflation in Q2, there is no indication of any acceleration at this stage, notwithstanding a partial rebound in fuel prices.”
“Third, although speculators have expanded short positions in the past fortnight, we think the risk of a squeeze remains contained. The kiwi’s (weekly) beta to speculative IMM positioning implies that the exhaustive unwinding of net shorts to a perfectly neutral net position would lift the broad NZD by two big figures. Even in the ‘hawkish’ scenario above, however, the reinforced easing bias would leave a sizeable core of strategic short positions in place.”
“We believe that many long-term real money players have refrained from entering tactical kiwi shorts in the past fortnight and remain invested in high-yielding NZD assets, with foreigners still owning more than two thirds of kiwi sovereign bonds. Of course, with 42bps of easing priced for the rest of the year, even a delay in the easing cycle would not prevent the gradual unwinding of these increasingly unprofitable positions over the coming months. Yet it means that if the RBNZ were to hold, a smaller share of the market would scramble to cover short positions than the IMM data may suggest.”
“In sum, we stay short and target 0.68 against USD and 72 in the TWI.”
Key Quotes
“First, the RBNZ’s primary rationale to cut is no longer to weaken the exchange rate but to ease domestic credit conditions. A weaker NZD may offer much-needed support for tradables inflation, but RBNZ staffers have acknowledged that they have primarily been too optimistic on non-tradables inflation in past forecasts.”
“Second, even if the RBNZ decided not to cut the OCR, the most ‘hawkish’ outcome from the review would be a firmer easing bias than the contingent one expressed in April. Lower inflation projections in the MPS would likely be coupled not only with dovish language around the exchange rate, as usual, but also a shifting of the contingency of a rate cut from weakening inflationary pressure to weak inflation not rising in line with projections by the next review on July 23, which is preceded by the release of the Q2 CPI on July 15. The RBNZ will be aware that a loss dovish statement would result in a painful squeeze in the exchange rate. As for core inflation in Q2, there is no indication of any acceleration at this stage, notwithstanding a partial rebound in fuel prices.”
“Third, although speculators have expanded short positions in the past fortnight, we think the risk of a squeeze remains contained. The kiwi’s (weekly) beta to speculative IMM positioning implies that the exhaustive unwinding of net shorts to a perfectly neutral net position would lift the broad NZD by two big figures. Even in the ‘hawkish’ scenario above, however, the reinforced easing bias would leave a sizeable core of strategic short positions in place.”
“We believe that many long-term real money players have refrained from entering tactical kiwi shorts in the past fortnight and remain invested in high-yielding NZD assets, with foreigners still owning more than two thirds of kiwi sovereign bonds. Of course, with 42bps of easing priced for the rest of the year, even a delay in the easing cycle would not prevent the gradual unwinding of these increasingly unprofitable positions over the coming months. Yet it means that if the RBNZ were to hold, a smaller share of the market would scramble to cover short positions than the IMM data may suggest.”
“In sum, we stay short and target 0.68 against USD and 72 in the TWI.”