RBNZ Holds Rates at 2.25% as Middle East Conflict Fuels Inflation Concerns 
ECB Warns of Rising Inflation Risks Amid Iran War Energy Shock 
BOJ Rate Decision in Focus as Yen, Inflation, and Nikkei Hang in Balance 
RBI Holds Interest Rates Steady Amid Middle East Tensions and Global Uncertainty 
Japan Inflation Expectations Rise as BOJ Rate Hike Timing Faces Uncertainty 
Bank of England Set to Hold Interest Rates as Inflation Risks and Iran War Impact Loom 
Bank of Korea Nominee Shin Hyun-song Signals Possible Rate Hike Amid Middle East Inflation Fears 
Morgan Stanley: Fed Rate Cuts Still on Track Despite Oil-Driven Inflation 
Bank of Japan Governor Signals Accommodative Stance Amid Negative Real Rates 
Bank of Japan's Ueda Flags Low Real Interest Rates as Key Factor in Rate Hike Timing 
Citigroup Delays Fed Rate Cut Forecast Amid Strong Jobs Data and Inflation Concerns 
Singapore Tightens Monetary Policy Amid Middle East War Inflation Risks 
The current prices of NZDCAD hold stronger at supports of 0.9307 despite gravestone doji, upswings likely to drag further but the stiff resistance seen at 0.9517 levels. On a broader perspective, the triple top formation on monthly charts is spotted out, but it puzzles with a non-directional trend with reducing volumes on rising prices.
As we’ve seen a sense of strength again to the Canadian dollar in the recent past especially cushioned by crude price but long term sustenance is still highly dubious.
New Zealand continues to suffer from disinflationary pressures, with reported CPI inflation well below the RBNZ’s 1-3% target range. It is also more exposed to China growth risks than Canada.
Consequently, the market pricing for a 25bp OCR cut to 1.75% by 10 November implies an 80% chance, lower than the 98% priced in a week ago. There are two reasons for this decline: first, the RBNZ has communicated that it prefers to move on MPS dates, which means September can be ruled out; there will be a lot of fresh information between now and November which could sway the RBNZ either way.
Our view is that a Nov cut is highly likely. The second reason is that US rates have risen amid hawkish Fed speak during the past week. Yellen’s speech on Friday has the potential to confirm that hawkishness, which means pricing for a December hike could rise from the currently fence-sitting 50%.
On valuation terms, NZD remains overvalued, while milk powder prices have stayed depressed and inflation in New Zealand has surprised to the downside. The OCR is likely to be cut to 1.75% in November.
NZD TWI strength is a major concern, together with downside risks to global growth. But TWI strength is not solely yield driven. Growth matters too and lowers interest rates are stimulating growth.
On the flip side, the Canadian dollar offers better value, and should continue to benefit from more stable crude oil prices and the US economic recovery.
In addition to that, the Kiwi has a very export-driven competitive economy with exports accounting for about 30% of GDP.
Most notably, China has been the major trade partner of Kiwis, China overtook the United States at the end of 2008 to become New Zealand's second-largest trading partner, with bilateral trade amounting to $12.7 billion in the year ended September 2011.
Chinese demand for New Zealand commodity exports, especially dairy products, and logs, has risen rapidly in recent times and has been the major factor in the recent surge in New Zealand's commodity prices and terms of trade.
Thus, for now, amid short-term bullish speculative trades the recommendation for medium-term perspective is that stay short NZDCAD is a relative value trade with low correlation to global market trends. Maintain shorts either through mid-month futures or options spreads.
