29 May 2014
An unloved Kiwi: Why a bearish case makes sense
FXStreet (Bali) - The New Zealand Dollar is the worst performing currency in the last 24h, with leveraged names reportedly very active selling major kiwi amounts at the last European open, with the cascade of orders taking the spot rate to its lowest since March 12 at 0.8470.
RBNZ hiking cycle fully price in
Despite being a high yielding currency, which tends to guarantee solid buying interest from carry trade seeker in the context of a rather friendly risk-on market profile, the New Zealand Dollar, among other factors, is currently suffering the consequences of carrying the burden of an almost fully priced in rate hiking cycle by the RBNZ, which makes the currency vulnerable to depreciation once the initial tightening expectations by the market are altered.
There are several negative inputs having hit investor's confidence towards the Kiwi recently. Firstly, talk has it that even if the RBNZ is committed to keep raising rates in the next 2 years for a potential peak at 5%-5.5%, it is contemplating a near-term pause in its rate hiking cycle, which could be confirmed at its June meeting, with Governor Wheeler saying back on May 6 that "the currency will be a factor in assessing rate rises." If one throws into the mix that some of the strong NZ domestic indicators such as retail sales, NZ PMI, trade balance or business confidence disappointed in the last month, the market is understandably more cautious on the RBNZ rates outlook next month.
Ross Woodfield, Strategist at Blackwell Global Investments, notes: "Given that the market is expecting a further 3 raises in the interest rate before the end of the year, it is difficult to see any upside potential to the Kiwi. One can assume the rate hikes have been priced in, so if they materialise, the market will not move any higher."
RBNZ intervention threat weighs
Another recent headline weighing on the Kiwi is the warning given by RBNZ Governor Wheeler, who sent a message about possible future intervention on the currency, saying that "if NZ dollar stays high in face of worsening fundamentals RBNZ could sell currency." Certain sectors of the market are starting to suspect that current NZD strength could delay rate hikes or force Wheeler to intensify its verbal intervention, limiting NZD upside. At this point, even if there is a recognition that the RBNZ's firepower to intervene is limited - any intervention would only have be limited in both magnitude and over time - , there are times, especially when market specs are still sitting with large net long positions in the NZD, that by simply telegraphing one's intentions - even if the main purposes only aims to scare the market -, is enough to be used as an excuse to strengthen the bear case.
Even if the intervention threat could be a catalyst credible enough to justify the unwinding of positions, the market is well aware that judging by historical actions, any RBNZ intervention is a long way off. There is a good chance that by keeping the NZD heavy, the RBNZ gets away with what it really wants, that is, warnings not translate dinto actions but yet effective for the intervention never actually occurring. According to Strategists at Bank of New Zealand, "it will be the Bank’s goal that by threatening such action it will not need to implement it."
Furthermore, Fonterra just cut its forecast milk price for this year to $8.40 per kilogramme of milk solids vs $8.65 previous, while forecast for the 2014/15 season was projected at $7, which despite coming slightly higher than consensus, it is still significantly lower than in recent times. This will be yet another factor weighing on the New Zealand Dollar going forward.
Conclusion
To sum up, after enjoying a stellar ride north off August 2013 lows, expected interest rate hikes already priced in, signs of worsening fundamentals - within context of still very healthy levels -, threats of RBNZ intervention, and the recent breakout of a key psychological level at 0.85 today, all combined should present traders with an opportunity to sell the Kiwi mid term.
RBNZ hiking cycle fully price in
Despite being a high yielding currency, which tends to guarantee solid buying interest from carry trade seeker in the context of a rather friendly risk-on market profile, the New Zealand Dollar, among other factors, is currently suffering the consequences of carrying the burden of an almost fully priced in rate hiking cycle by the RBNZ, which makes the currency vulnerable to depreciation once the initial tightening expectations by the market are altered.
There are several negative inputs having hit investor's confidence towards the Kiwi recently. Firstly, talk has it that even if the RBNZ is committed to keep raising rates in the next 2 years for a potential peak at 5%-5.5%, it is contemplating a near-term pause in its rate hiking cycle, which could be confirmed at its June meeting, with Governor Wheeler saying back on May 6 that "the currency will be a factor in assessing rate rises." If one throws into the mix that some of the strong NZ domestic indicators such as retail sales, NZ PMI, trade balance or business confidence disappointed in the last month, the market is understandably more cautious on the RBNZ rates outlook next month.
Ross Woodfield, Strategist at Blackwell Global Investments, notes: "Given that the market is expecting a further 3 raises in the interest rate before the end of the year, it is difficult to see any upside potential to the Kiwi. One can assume the rate hikes have been priced in, so if they materialise, the market will not move any higher."
RBNZ intervention threat weighs
Another recent headline weighing on the Kiwi is the warning given by RBNZ Governor Wheeler, who sent a message about possible future intervention on the currency, saying that "if NZ dollar stays high in face of worsening fundamentals RBNZ could sell currency." Certain sectors of the market are starting to suspect that current NZD strength could delay rate hikes or force Wheeler to intensify its verbal intervention, limiting NZD upside. At this point, even if there is a recognition that the RBNZ's firepower to intervene is limited - any intervention would only have be limited in both magnitude and over time - , there are times, especially when market specs are still sitting with large net long positions in the NZD, that by simply telegraphing one's intentions - even if the main purposes only aims to scare the market -, is enough to be used as an excuse to strengthen the bear case.
Even if the intervention threat could be a catalyst credible enough to justify the unwinding of positions, the market is well aware that judging by historical actions, any RBNZ intervention is a long way off. There is a good chance that by keeping the NZD heavy, the RBNZ gets away with what it really wants, that is, warnings not translate dinto actions but yet effective for the intervention never actually occurring. According to Strategists at Bank of New Zealand, "it will be the Bank’s goal that by threatening such action it will not need to implement it."
Furthermore, Fonterra just cut its forecast milk price for this year to $8.40 per kilogramme of milk solids vs $8.65 previous, while forecast for the 2014/15 season was projected at $7, which despite coming slightly higher than consensus, it is still significantly lower than in recent times. This will be yet another factor weighing on the New Zealand Dollar going forward.
Conclusion
To sum up, after enjoying a stellar ride north off August 2013 lows, expected interest rate hikes already priced in, signs of worsening fundamentals - within context of still very healthy levels -, threats of RBNZ intervention, and the recent breakout of a key psychological level at 0.85 today, all combined should present traders with an opportunity to sell the Kiwi mid term.