NZD/USD: Scope for further gains - BNZ

After a period through late June and early July, during which the 0.7350 area had proved tough to crack on the upside, NZD/USD finally broke up through it late in the week, opening the door to further gains, pushing on, first through 0.7450 then punching above 0.7550 before meeting resistance.

Key Quotes

“Positive risk sentiment, higher commodity prices, and a lack of jawboning from the RBNZ in last week’s speech from Assistant Governor McDermott still has the NZD in the ascendency. Indeed, in the speech there was an implication that the NZD is not overvalued given the likes of a positive outlook for the terms of trade. We agree. A positive GDT auction result this week, as the indicators suggest, would add support to the notion. Higher oil prices, however, are pushing a bit the other way.”

“The RBNZ does not look about to follow some other central banks into becoming more hawkish. Inflation has undershot RBNZ expectations and the NZ TWI is running circa 4.5% ahead of the Bank’s latest assumptions. This is diminishing the likelihood of a mid-2018 tightening. From a relative monetary policy perspective, we do not see the RBNZ’s stance lending NZD support over coming months.”

“USD indices are approaching critical levels. There is plenty on the calendar this week to navigate including tonight’s PCE deflator and ISM manufacturing survey ahead of Friday’s payrolls and average earnings. A break lower would call into question the degree of decline we see for the NZD/USD into year end. For now we stick with the idea that narrower NZ-US rate spreads ahead and some weakening in risk appetite will see a shift downward over time. However, in the near term, with strong positive momentum, we wouldn’t be surprised to see NZD/USD push up closer to our short term fair value estimate, especially if the USD continues to weaken. Last week’s high just under 0.7560 is an area of interest topside, while we see 0.7460 as an area of near term support.”

“One hurdle to further NZD/USD near term gains is that speculative longs remain close to record levels implying some downside vulnerability if the data disappoint.”