NZD/USD: a negative bias, narrowing of rate differentials hard to ignore - ANZ

Analysts at ANZ explained that they retain a negative bias towards the NZD. 

Key Quotes:

"NZD positioning remains extremely long and USD positioning is extremely short.

New Zealand’s relative economic position is slipping as the cycle matures and momentum picks up elsewhere.

We continue to expect an imminent turn in the global liquidity cycle, which will present challenges for risk currencies/assets. Abundant official and market liquidity (driven by low risk aversion) has been a key source of support for peripheral currencies. This cycle has peaked with central banks inching closer to the exit door.

US economic data is stabilising, making it more difficult to be overly bearish the greenback.

The narrowing of NZ-US interest rate differentials is hard to ignore. A meagre 62bps separates 3mth rates; the gap was 350bps less than 3 years ago.

While valuations are giving neutral signals, and we are mindful of lingering USD “resentment”, he above combination leaves us wary of chasing higher highs for the NZD/USD.

Looking at local-specific factors, markets appear to be taking a relaxed view of the upcoming election. That’s hardly surprising given the incumbent Government’s high polling. Yet the reality of proportional representation is that is doesn’t take much of a shift to change the election outcome. That said, by global comparison, NZ politics is tame."