SELL NZD/USD – TRADE UPDATE
TOP TRADE
Kiwis Can’t Fly
We saw this as an opportunity to short NZD/USD (Sell NZD and Buy USD) ahead of the last US Federal
Reserve Meeting towards the end of October. Post the meeting we have seen significant US dollar strength as the market once again sees the prospect of a US rate hike this year as back on the table. The next 2 day US Fed meeting will be held on the 15/16th of December will be crucial and we continue to see downside risks to the NZD/USD heading into the meeting.
- Over the medium term we believe the US Fed will be the primary driver of the NZD/USD exchange rate
- We continue to see downside risks to the NZD/USD heading into the US Fed meeting on the 15/16th of December
- 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 October there was slight relief that saw the NZD/USD rally back to just over $0.68. We saw this as an opportunity to short NZD/USD (Sell NZD and Buy USD) ahead of the last US Federal Reserve Meeting towards the end of October. Post the meeting we have seen significant US dollar strength as the market once again sees the prospect of a US rate hike this year as back on the table. Over the medium term we believe the US Fed will be the primary driver of the NZD/USD exchange rate.
NZD/USD Trends Down in 2015
Source: Research
Hence the next 2 day US Fed meeting will be held on the 15/16th of December will be
crucial and we continue to see downside risks to the NZD/USD heading into the
meeting. The decision made by the Fed will be based upon US economic data, in
particular US labour market data, which continues to show strength of late. There is a
distinct possibility of the Federal Reserve hiking interest rates for the first time in 9
years in December, which would see further US dollar strength, in our view.
On the flipside 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.
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.
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 return an 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.
NZD/USD Reversing a Multi-Year Trend
Source: Research
We first opened our trade on the 27th of October, ahead of a widely anticipated US
Federal Reserve Meeting. Our view was the market had wrongly assumed that the Fed
would delay lifting interest rates off zero, and the strength in the US dollar post meeting proved we were correct.
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.
Summary
1) Over the medium term we believe the US Fed will be the primary driver of
the NZD/USD exchange rate
2) We continue to see downside risks to the NZD/USD heading into the US Fed
meeting on the 15/16th of December
3) Dairy prices are once again showing weakness which is weighing on the NZ
dollar
4) We see fair value of the NZD/USD exchange rate at closer $0.60