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A slight loss of NZ economic momentum over the next quarter and more neutral speculator positioning (from extremely short) should weigh on the NZD. Key, though, will be the behavior of the US dollar. if the Fed hikes twice more in 2019, NZDUSD should fall below 0.66 by May. The RBNZ expects to remain on hold over the next year at least, and we agree. That should cap 2yr yields at 2.30%, while a slight loss of economic momentum both in NZ and in developed economies could see the lower bound at 1.95% tested occasionally as markets flirt with a rate cut.
Keep defensive anti-cyclical exposure through short NZDUSD. The 2019 Outlook, we had adopted a cautiously defensive position in part expressed through short NZDUSD.
We continue to like NZD shorts given expectations of a dovish-to-unchanged monetary policy and also given its sensitivity to global growth. The main event this week for New Zealand was the soft 4Q CPI report.
We don’t think this justifies a rate cut from the RBNZ in 2019, even though we do expect downgrades to inflation (mostly on oil) and growth and thus a dovish spin on the outlook.
Note that the AED we recommended in November expired worthless, but we still retain short NZDUSD exposure in outright spots and reactivated optionality.
Sell NZDUSD at 0.6783, stop at 0.6919. Stay short in NZDUSD through an AED digital put (strike of 0.6195, expiry 28thFeb, 2019). Courtesy: Westpac, JPM
Currency Strength Index: FxWirePro's hourly NZD spot index is flashing 107 (which is bullish), while hourly USD spot index was at -58 (bearish) while articulating (at 10:11 GMT).
For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex
