FxWirePro: NZD/USD bullish and bearish perspectives and swap rates

The spot NZDUSD prices seem to be fragile to correcting further towards 0.7400 for the day.

Medium term perspectives: Stretched technical indicators and stretched long positioning argue for a decent downward correction, but until the broad US dollar starts to recover from its seven-month old decline, the NZD can remain elevated. Eventually, if the Fed’s normalization cycle pushes US interest rates and the US dollar higher, NZDUSD could fall to 0.6800 by year end.

In bullish scenarios, we foresee NZDUSD to go towards 0.75 if:

1) The dairy sector’s recovery accelerates, reining in the current account deficit; or

2) The migration flows and housing kick up another gear.

In bearish scenarios, NZDUSD is expected to go below 0.68 if:

1) The housing market decelerates more sharply under the strain from tighter credit conditions;

2) Migration rolls over due to a shift in government policy;

3) The funding issues intensify, causing the market to question NZ's ability to attract capital inflow.

The commodity currencies underperformed (led by NOK and RUB, but also CAD, AUD, and NZD) against a generally firmer USD and DXY regained levels above 93.0.

The RBNZ has signaled the next cycle – a tightening one – will not start until the end of 2019. That will anchor the short end, although markets will not abandon their expectations for tightening as early as mid-2018 which would mean occasional spikes in the 2yr will be likely. A 2yr swap range of 2.10%-2.60% is expected. The long end will continue to follow US yields, which we expect to rise by year end.