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NZD CHF - FUNDAMENTAL DRIVERSNZD FUNDAMENTAL BIAS: WEAK BULLISH 1. Monetary Policy The RBNZ underwhelmed some market participants who were looking for a 50bsp hike as the bank only delivered on a 25bsp hike as consensus was expecting. Even though the NZD took a plunge after the meeting, we don’t think markets are really giving NZD the upside it deserves after the Nov RBNZ decision. Not referring to the knee-jerk lower after the 25bsp hike of course as that was fully priced in and always ran the risk of underwhelming the bulls, but the outlook in the MPR justifies more NZD strength. The upgrades to the economic outlook between Aug and Nov was positive, with growth seen lower in 2022 but much higher in 2023, CPI is seen higher throughout 2022 and 2023, the Unemployment rate seen lower throughout the forecast horizon, and of course the big upgrade tothe OCR which is now seen at 2.6% by 2024, and the bank has brought forward their expectation of reaching the 2.0% neutral rate with 5 quarters. Of course, incoming data will be important (as always) and any new developments with the new Omicron variant will be watched but barring any major deterioration in the economic data the recent sell off in the NZD does seem at odds with the fundamental, policy and economic outlook. 2. Economic and health developments Just as the domestic borders are opening up in New Zealand, the Omicron concerns across the globe are ramping up with governments like the UK lifting the alert level to 4 over the weekend. Even though the government has abandoned a draconian covid-zero strategy, a ramp in Omicron cases can of course see further restrictions being announced. The recent macro data has been much better than both the markets and the RBNZ had expected, but markets have not been too bothered with the incoming data and have not given the NZD the upside it deserves in our opinion. For now, based on the economic and policy outlook the NZD seems undervalued at current prices, but we need to keep close track of the overall risk sentiment given the associated risks of the new variant. 3. Global Risk Outlook As a high-beta currency, the NZD benefited from the market's improving risk outlook coming out of the pandemic as participants moved out of safe-havens. As a pro-cyclical currency, the CAD enjoyed upside alongside other cyclical assets supported by reflation and post-recession recovery best. If expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the NZD in the med-term, but recent short-term jitters are a timely reminder that risk sentiment is also a very important short-term driver. 4. CFTC Analysis Latest CFTC data showed a positioning change of +78 with a net non-commercial position of +10708. Positioning is not stretched compared to historical net-long levels, but as the second largest netlong for large speculators and the biggest for leveraged funds there is always scope for unwinding if we see strong bouts of risk off sentiment like we had over the past two weeks. However, it’s very encouraging to see that leveraged funds have once again increased their net-longs despite the recent underperformance from the NZD which could mean that we are not the only ones that sees value in buying the NZD from current ‘undervalued’ levels. 5. The Week Ahead In the week ahead the main drivers for global markets will of course be the huge amount of central bank meetings, so risk sentiment will be important for the NZD on the back of that. Apart from central bank meetings, we do have Governor Orr’s testimony coming up on Tuesday, which will be one to keep on the radar with the new variant in mind. Furthermore, we have quarterly GDP coming up on Wed as well, which will be interesting for the NZD. Recall that most of the recent macro data has been surprising meaningfully to the upside, but the Q3 print is expected to see a decent contraction close to -4.5% due to the Q3 covid lockdowns. Thus, markets are likely to discount a bigger miss as covid-related but could add more importance if we see a much smaller contraction and could be supportive for the NZD. CHF FUNDAMENTAL BIAS: BEARISH 1. Monetary Policy At its most recent meeting, all policies remained unchanged with the policy rate kept at -0.75% and the bank keeping the CHF classification as ‘highly valued’. The bank reiterated an all too familiar willingness to intervene in the FX market in order to counter upward pressure on the CHF. The bankreassured markets that recent upside in the CHF has not gone unnoticed. The bank also noted that the new conditional inflation forecast for 2021 and 2022 is slightly higher than in June but said that this is due to current supply chain challenges and stressed that their longer-term view of inflation is ‘virtually unchanged compared with June’. The bank also explained that the vulnerability of the mortgage and real estate markets have risen, and that they are keeping a close eye on Mortgage lending and residential property prices, but also stated that they regularly assess the possible needs for reactivating the countercyclical buffers. All in all, this meeting provided nothing new for markets and as such was not enough to change our fundamental dovish outlook. 2. Global Risk Outlook As a safe-haven currency, the market's risk outlook is usually the primary driver for the CHF with economic data and SNB policy meetings rarely market moving. Although SNB intervention can have a substantial impact on CHF, its impact tends to be relatively short-lived. Additionally, the SNB are unlikely to adjust policy anytime soon, given their overall dovish disposition and preference for being behind the ECB in terms of policy decisions. The market's overall risk tone remains constructive in the med-term due to the global vaccine roll out and the massive amount of monetary policy and fiscal support from governments. The Delta variant and its impact on growth expectations is of course a sobering reminder that risks remain, especially with new variants like Omicron. Thus, there is still a degree of uncertainty and risks to the overall risk outlook remains which could prove supportive for the safe havens like the CHF should negative factors for the global economy develop. But on balance the overall risk outlook is positive in the med-term. 3. Idiosyncratic Drivers Despite the fundamental bearish bias, the CHF continues to remain surprisingly strong and is a friendly reminder that the CHF often has a mind of its own. Even though SNB intervention is a downside risk to keep in mind, the bank has been surprisingly sanguine with EURCHF breaking below 1.04. Some research argues that recent CHF strength could be due to the lower inflation in Switzerland compared to the EU, UK and US, which has meant more demand for Swiss goods and has meant less need for capital flight. Thus, inflation differentials as well as trade data out of Switzerland could serve as proxies for where the currency goes in the med-term. 4. CFTC Analysis Latest CFTC data showed a positioning change of +2129 with a net non-commercial position of - 12053. With positioning close to neutral for large specs and leveraged funds, the overall driver in the short-term remains underlying risk sentiment, and of course possible SNB intervention. 5. The Week Ahead In the week ahead the main drivers for global markets will of course be the huge amount of central bank meetings, so risk sentiment will be important for the NZD on the back of that. We do also have the SNB coming up later in the week, where the biggest focus will be on what the bank has to say about the CHF’s recent strength, especially versus the EUR. Even though sight deposits have increased after the previous meeting, they are nowhere near the levels compared to previous occasions when the EURCHF was trading sub-1.05. Any commitments to intervene will probably be ignored by markets unless it is backed up with a visible increase in the sight deposits.
by thunderpips
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