NZD CHF - FUNDAMENTAL DRIVERS
NZD
FUNDAMENTAL BIAS: BULLISH
1. Developments surrounding the global risk outlook.
As a high-beta currency, NZD has benefited from the market's improving risk outlook over recent months as participants moved out of safehavens and into riskier, higher-yielding assets. As a pro-cyclical currency, the NZD enjoyed upside alongside other cyclical assets going into what majority of market participants think was an early post-recession recovery phase. As long as 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 the recent short-term jitters and risk off flows once again showed us why risk sentiment is also a very important short-term driver for the currency.
2. The Monetary Policy outlook for the RBNZ
New Zealand’s Zero Covid strategy caused quite the rigmarole for the NZD this week as market participants were forced to unwind some of their very aggressive expectations for rate hikes going into the meeting. The unwind was so aggressive that OIS prices dropped from a 100% chance of a hike to just above 50% at some stage. The RBNZ chose to leave rates unchanged, but despite the virus escalation they offered a much more optimistic tone compared to their prior meeting by updating their rate path projections to show 7 projected hikes between Dec 2021 and H1 2023 (bringing the OCR to 2.0%). This was even more aggressive than the already aggressive bets heading into the meeting before the covid news hit the wires. The Governor also later explained that they need to continue to move on policy and cannot wait for uncertainty as they have a lot of work to do to get back to the neutral rate of 2.0%. Also, when asked about Oct Governor Orr said the meeting is live, but also acknowledged that they’ve made it very clear their next move is likely a hike so they can afford to wait. Thus, with the upgraded rate path the med-term bullish outlook remains intact for the NZD. Last week we saw very hawkish comments from RBNZ’s Hawkesby who stated that the bank’s decision not to hike rates last week was mostly to do with optics and not due to perceived risks, and also explained that the bank contemplated hiking rates by 50 basis points, confirming the bank’s hawkish tone and placing the RBNZ once again miles ahead of any other major central banks in terms of policy normalization and tightening.
3. The country’s economic and health developments
The main focus right now will be on how quickly the New Zealand government can get the virus situation under control. We’ve already heard some good news that the government has been able to trace the source of the recent outbreak and should be able to get the situation under control. This will be a key factor to watch in the next few sessions. After solid Q2 GDP data we saw yields push higher at the front-end, which could see markets price in a possible hike in rates as early as the October meeting, so keeping track of the short end this week.
4. CFTC Analysis
Latest CFTC data (updated until 14 Sep) showed a positioning change of +2343 with a net non-commercial position of +6206. With the overall optimistic rate path from the RBNZ, the bias for the currency remains unchanged, and with a small net-long positioning the current spot levels for the NZD still looks attractive for med-term buyers, but short-term moves do still look a bit overdone at current levels.
CHF
FUNDAMENTAL BIAS: BEARISH
1. Developments surrounding the global risk outlook.
As a safe-haven currency, the market's risk outlook is the primary driver for the CHF. Swiss economic data rarely proves market moving; and 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 bearish tone and a preference for being behind the ECB in terms of policy decisions. The market's overall risk tone has improving considerably from just a year ago because of the global vaccine roll out and the unprecedented amount of monetary policy accommodation and fiscal support from governments. The Delta variant and subsequent impact on growth expectations is of course a sobering reminder that risks remain. 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. However, on balance the overall risk outlook is continuing to improve and barring any major meltdowns in risk assets the bias for the CHF remains bearish in the med-term.
2. Idiosyncratic drivers for the CHF
Despite the negative drivers, the CHF has remained surprisingly strong over the past couple of weeks. This divergence from the fundamental outlook doesn’t make much sense, but the CHF often has a mind of its own and can often move in opposite directions from what short-term sentiment or its fundamental outlook suggests. Recent research from the team has revealed an interesting correlation between the CHF simultaneous price moves in Gold and the USD which could explain some of the recent price action. We also need to be careful of the possibility of SNB FX intervention. Apart from that, ING investment bank has recently argued that recent CHF strength could be due to the lower inflation in Switzerland compared to the EU which meant that the real trade-weighted CHF has been trading too cheap. They also expanded that the ECB’s bond buying has meant that their balance sheet is expanding more rapidly compared to that of the SNB, which could have been reasons why the SNB did not see the need for any meaningful FX intervention lately. The bottom line is that there are often plenty of idiosyncratic drivers which might or might not impact the CHF and makes short-term price fluctuations a mixed bag for the most part.
3. CFTC Analysis
Latest CFTC data (updated until 14 Sep) showed a positioning change of -6098 with a net non-commercial position of -5878. The CHF positioning continued to unwind some of its recent surprising strength over the past few weeks. The CHF has now moved back into net-short territory as one would expect from a currency with an overall med-term bearish outlook. Even though we expect the currency to continue weakening in the med-term, any drastic escalation in risk off tones could continue to provide support for the safe-haven currency in the short-term.
FUNDAMENTAL BIAS: BULLISH
1. Developments surrounding the global risk outlook.
As a high-beta currency, NZD has benefited from the market's improving risk outlook over recent months as participants moved out of safehavens and into riskier, higher-yielding assets. As a pro-cyclical currency, the NZD enjoyed upside alongside other cyclical assets going into what majority of market participants think was an early post-recession recovery phase. As long as 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 the recent short-term jitters and risk off flows once again showed us why risk sentiment is also a very important short-term driver for the currency.
2. The Monetary Policy outlook for the RBNZ
New Zealand’s Zero Covid strategy caused quite the rigmarole for the NZD this week as market participants were forced to unwind some of their very aggressive expectations for rate hikes going into the meeting. The unwind was so aggressive that OIS prices dropped from a 100% chance of a hike to just above 50% at some stage. The RBNZ chose to leave rates unchanged, but despite the virus escalation they offered a much more optimistic tone compared to their prior meeting by updating their rate path projections to show 7 projected hikes between Dec 2021 and H1 2023 (bringing the OCR to 2.0%). This was even more aggressive than the already aggressive bets heading into the meeting before the covid news hit the wires. The Governor also later explained that they need to continue to move on policy and cannot wait for uncertainty as they have a lot of work to do to get back to the neutral rate of 2.0%. Also, when asked about Oct Governor Orr said the meeting is live, but also acknowledged that they’ve made it very clear their next move is likely a hike so they can afford to wait. Thus, with the upgraded rate path the med-term bullish outlook remains intact for the NZD. Last week we saw very hawkish comments from RBNZ’s Hawkesby who stated that the bank’s decision not to hike rates last week was mostly to do with optics and not due to perceived risks, and also explained that the bank contemplated hiking rates by 50 basis points, confirming the bank’s hawkish tone and placing the RBNZ once again miles ahead of any other major central banks in terms of policy normalization and tightening.
3. The country’s economic and health developments
The main focus right now will be on how quickly the New Zealand government can get the virus situation under control. We’ve already heard some good news that the government has been able to trace the source of the recent outbreak and should be able to get the situation under control. This will be a key factor to watch in the next few sessions. After solid Q2 GDP data we saw yields push higher at the front-end, which could see markets price in a possible hike in rates as early as the October meeting, so keeping track of the short end this week.
4. CFTC Analysis
Latest CFTC data (updated until 14 Sep) showed a positioning change of +2343 with a net non-commercial position of +6206. With the overall optimistic rate path from the RBNZ, the bias for the currency remains unchanged, and with a small net-long positioning the current spot levels for the NZD still looks attractive for med-term buyers, but short-term moves do still look a bit overdone at current levels.
CHF
FUNDAMENTAL BIAS: BEARISH
1. Developments surrounding the global risk outlook.
As a safe-haven currency, the market's risk outlook is the primary driver for the CHF. Swiss economic data rarely proves market moving; and 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 bearish tone and a preference for being behind the ECB in terms of policy decisions. The market's overall risk tone has improving considerably from just a year ago because of the global vaccine roll out and the unprecedented amount of monetary policy accommodation and fiscal support from governments. The Delta variant and subsequent impact on growth expectations is of course a sobering reminder that risks remain. 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. However, on balance the overall risk outlook is continuing to improve and barring any major meltdowns in risk assets the bias for the CHF remains bearish in the med-term.
2. Idiosyncratic drivers for the CHF
Despite the negative drivers, the CHF has remained surprisingly strong over the past couple of weeks. This divergence from the fundamental outlook doesn’t make much sense, but the CHF often has a mind of its own and can often move in opposite directions from what short-term sentiment or its fundamental outlook suggests. Recent research from the team has revealed an interesting correlation between the CHF simultaneous price moves in Gold and the USD which could explain some of the recent price action. We also need to be careful of the possibility of SNB FX intervention. Apart from that, ING investment bank has recently argued that recent CHF strength could be due to the lower inflation in Switzerland compared to the EU which meant that the real trade-weighted CHF has been trading too cheap. They also expanded that the ECB’s bond buying has meant that their balance sheet is expanding more rapidly compared to that of the SNB, which could have been reasons why the SNB did not see the need for any meaningful FX intervention lately. The bottom line is that there are often plenty of idiosyncratic drivers which might or might not impact the CHF and makes short-term price fluctuations a mixed bag for the most part.
3. CFTC Analysis
Latest CFTC data (updated until 14 Sep) showed a positioning change of -6098 with a net non-commercial position of -5878. The CHF positioning continued to unwind some of its recent surprising strength over the past few weeks. The CHF has now moved back into net-short territory as one would expect from a currency with an overall med-term bearish outlook. Even though we expect the currency to continue weakening in the med-term, any drastic escalation in risk off tones could continue to provide support for the safe-haven currency in the short-term.
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