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Monday November 25, 2013 - 01:01:29 GMT
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NZ Morning Thoughts - FX & IR

 

NZ Morning Thoughts - FX & IR

Imre Speizer

 

NZD/USD is breaking down amid persistent Fed tapering expectations.

11:41AM, 25 Nov 2013

 

NZD/USD Outlook: Down this week

NZD/USD is breaking down amid persistent Fed tapering expectations.

Last Friday’s break below the key 0.8200 area has been sustained, pointing to a further decline to around 0.7900 during the weeks ahead. While NZ economic news remains upbeat (Chart 3), market expectations of the Federal Reserve’s policy actions continue to dominate.

By early 2014, though, strong NZ fundamentals and RBNZ tightening should dominate, taking NZD/USD towards 0.8600.

Event Risk This Week

This week’s NZ calendar is again busy with second tier releases. Trade balance (Wed), monthly business confidence (Thu) and building permits and money supply (both Fri) are the main data releases. There’s also the RBNZ’s monthly fx flow update on Thursday to watch.

In the US, the key data prints include the Dallas Fed survey on Mon, housing starts, house price data, the Richmond Fed and consumer sentiment (all Tue), and durable goods orders, Chicago PMI and Uni. of Michigan consumer confidence (Wed). The Thanksgiving holiday is on Thu, with limited (financial market) trade late Wed or Fri.

The risks remain skewed for US data outperformance, at least relative to market expectations. Our US data surprise index remains at quite depressed levels but should rise over the next month or so. This should keep US interest rates and the US dollar well supported. Tapering is by no means a done deal at the December FOMC meeting but better data momentum relative to expectations should keep the market happy to buy the US dollar.

NZD/AUD Outlook: Up this week

This cross is breaking above its multi-month range.

Should it sustain the rise above 0.8930, then the uptrend will have resumed, targeting 0.9100 during the months ahead.

The uptrend is consistent with our view the RBA will need to cut the cash rate again, to 2.0% by mid-2014. Also, the RBNZ should start hiking in early 2014 from 2.50% to reach 3.50% by end-2014. These forecast central bank paths are not fully priced into the cross, giving it further upside potential.

Swap Yield Outlook: Up this week

The growing risk of positive US data surprises plus strong NZ fundamentals argues for higher rates during the weeks ahead.

NZ 2yr swaps are likely to test 3.67% while 10yr rates are likely to continue rising towards 5.40%. The next major events for NZ rates will be the RBNZ meeting on 12 December and the US payrolls report on 6 December.

Longer term, the RBNZ’s looming tightening cycle will push NZ rates higher, with the 2yr expected to rise above 3.80% by early-2014.

Swap Curve Outlook: Steeper this week

This steepening phase which started in late October should continue for a few more weeks if US rates continue rising.

The NZ short end remains constrained by the RBNZ’s timeline but the NZ long end is US-led. Our US data surprise index signals further upside in US long end rates. The 2-10yr swap curve targets 156bp near term.

Longer term, we expect a major flattening trend driven mainly by NZ interest rate markets pre-empting the RBNZ’s tightening cycle to produce a sharper rise at the front end of the curve than at the back. The 2-10yr should reach 90bp by early 2014.

 

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Amazing Trader EVENT RISK Calendar:


Tue 21 Nov
15:00 US- Existing Homes Sales
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15:30 US- EIA Crude
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  • POTENTIAL PRICE RISK: HIGH Mon -- 14:00 GMT EZ- Draghi speaks in Brussels. Looking for any policy hints or bias


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