NZD CAD - FUNDAMENTAL DRIVERSNZD
FUNDAMENTAL OUTLOOK: NEUTRAL
BASELINE
The NZD remains a tricky currency to pin down. Fundamentals that should have provided support over recent months haven’t, and the country’s lower terms of trade has made it the biggest loser among the high betas during recent weeks. The RBNZ stuck to the same script in their meeting this past week, disappointing some who were expecting some caution regarding the longevity of the bank’s current hiking cycle. This was initially supportive for the NZD, but as we’ve seen time and time again the NZD was not able to trade convincingly in line with what its fundamentals suggest. As always risk sensitivity needs to be kept in mind for the NZD, and that means US Q3 earnings season is one to be kept on the radar this incoming week. Any surprise positive or negative announcements from the National Congress of the CCP will be important to watch as well.
POSSIBLE BULLISH SURPRISES
Positive Covid developments in China (easing restrictions, more fiscal or monetary stimulus, or letting go of the covidzero policy) could trigger bullish reactions in the NZD. As a risk sensitive currency, and catalyst that causes big bouts of risk on sentiment could trigger bullish reactions in the NZD. Catalyst that triggers recovery in key export commodities (China stimulus, lifting covid restrictions, new infrastructure projects in China) should be supportive for the NZD. Data showing China’s growth outlook is improving or surprise announcement at the CCP congress that Covid-zero will end could provide upside for the NZD.
POSSIBLE BEARISH SURPRISES
Negative Covid developments in China (increasing restrictions or adding additional ones) could trigger bearish reactions in the NZD. As a risk sensitive currency, and catalyst that causes big bouts of risk off sentiment could trigger bearish reactions in the NZD. Catalyst that triggers further weakness in key export commodities (additional China restrictions, demand destruction) could be negative for the NZD. Data showing China’s growth outlook is deteriorating or strong affirmation that the covid-zero policy is here to stay could add additional pressure on the NZD.
BIGGER PICTURE
The bigger picture outlook for the NZD is neutral for now, but that is largely dependent on what happens to China as the New Zealand economy is also very dependent on trade with China and Australia, and also dependent on whether the RNBZ sticks to their hawkish tone or pivots more dovish in the meetings ahead. Given the currency’s inability to trade in line with any clear fundamental drivers, we’re opting to stay patient with the NZD until further notice.
CAD
FUNDAMENTAL OUTLOOK: NEUTRAL
BASELINE
Recent economic data has shown some deterioration for the growth outlook with three consecutive months of contraction in jobs, falling house prices, and a deceleration in both core and headline CPI. The previous jobs data gave the CAD a decent lift with it’s first jobs gain in four weeks, but at 21K jobs added, the job market is still down 92K jobs in the last four months. Just like the week before, Governor Macklem gave no intention that the bank is getting close to the end of their hiking cycle. Even though he didn’t specifically say that the market’s expectations for the terminal rate is too low, his concerns about inflation saw STIR markets price in close to 88% probability for another 50bsp later this month. That makes the CPI data this upcoming week all the more interesting. Even though inflation is still high, both core and headline 3M annualized CPI saw continued moves lower with the AUG print. Another bigger-than-expected miss will be an interesting one for markets to navigate and could provide some short-term opportunities.
POSSIBLE BULLISH SURPRISES
Catalysts that see upside in Oil (deteriorating supply outlook, ease in demand fears, OPEC developments) could trigger bullish CAD reactions. As a risk sensitive currency, and catalyst that causes big bouts of risk on sentiment could trigger bullish reactions in the CAD. After the bank’s frontloading, there is a very high bar to surprise on the hawkish side for the BoC, but if the bank were to say they think STIR market pricing for the terminal rate is too low that can provide upside for the CAD.
POSSIBLE BEARISH SURPRISES
Catalysts that trigger downside in oil (deteriorating demand outlook, ease in supply shortage, less supply constraints, OPEC developments) could be a negative catalyst for the CAD as well. As a risk sensitive currency, and catalyst that causes big bouts of risk off sentiment could trigger bearish reactions in the CAD. With the bank 100bsp away from terminal rate expectations, and after recent hawkish comments, it won’t take much to surprise dovish, and any signals or comments from the BoC that they’ll pause hikes should be a negative for the CAD.
BIGGER PICTURE
The bigger picture outlook for the CAD remains neutral for now. Given the clear risks to the growth outlook (recent negative econ data and fall in oil prices) we remain cautious on the currency. Furthermore, with lots of good news priced, and with the BoC close to terminal rate expectations, our preferred way of trading the CAD is lower on clear short-term negative catalysts. Biggest focus for the CAD in the week ahead will be the SEP CPI print where a further sign of strong deceleration will be an interesting one to watch, especially after the very recent hawkish BoC comments. Monday’s Business Outlook Survey is also one to watch as the release can cause strong directional flows as well. Apart from that, from a risk sentiment perspective we also need to watch the US Q3 earnings season ramping up this week.
