SELL NZD/USD – TRADE UPDATE
TOP TRADE
Kiwis Can’t Fly
Following a slide in the NZ dollar for most of the year, there has been slight relief which has seen the
NZD/USD rally back to just over $0.68. We see this as an opportunity to short NZD/USD (Sell NZD and Buy USD) ahead of the upcoming US Federal Reserve meeting.
- Over the medium term we believe the US Fed will be the primary driver of the NZD/USD exchange rate
- We see downside risks to the NZD/USD heading into theupcoming US Fed meeting
- Dairy prices are once again showing weakness which is
weighing on the NZ dollar - We see fair value of the NZD/USD exchange rate at closer $0.60
What’s new – All Eyes on the Fed
Following a slide in the NZ dollar for most of the year, there has been slight relief which has seen the NZD/USD rally back to just over $0.68. We see this as an opportunity to short NZD/USD (Sell NZD and Buy USD) ahead of the upcoming US Federal Reserve meeting. We believe the market is underestimating the chance that the US Fed will hike this year, as we believe speeches by Fed members very much indicate a hike could still be in the cards in 2015. If this plays out the USD could strengthen significantly, especially against the NZD which has rebounded of late. We see fair value of the NZD/USD exchange rate at closer $0.60, and remain very much of the view that we will see further weakness in the NZ dollar versus the US dollar
Investment Thesis – Why we like it
Following years of strength since 2010, the NZ dollar has finally retraced against the US dollar and we believe the weakness is set to continue. The key driver of our bearish view on the NZ dollar is relative interest rates in NZ compared to the US. Interest rates of a currency essentially illustrate how much returnan investor would receive by holding a currency, and the interest rate differential between the two currencies is a driver of currency strength (a higher interest rate will attract currency investors). As a result last few years the NZ dollar has benefitted from having relatively high interest rates, while the US Federal Reserve has kept interest rates at zero in the US. It is only in recent times with the US Fed ending its easing program and indicating hikes are imminent that the US dollar has experienced a
powerful rally.
In terms of rates in NZ, while there have been signs of improvement in the economy in
areas such as net migration, tourism, and business confidence, dairy prices are once
again showing weakness which is weighing on the NZ dollar. Hence our view on the
Reserve Bank of New Zealand is that interest rates will be kept at low levels, although
it is likely we will not see further cuts to the official cash rate (OCR) until 2016.
As well as interest rate differentials, a moderation in NZ economic growth at the same
time as the US economy continues to recover is central to our view of further weakness
in the NZD/USD.
Overall, we see fair value of the NZD/USD at around $0.60, and remain very much of
the view that we will see further weakness in the NZ dollar versus the US dollar.