NZD JPY BUY (NEW ZEALAND DOLLAR - JAPANESE YEN)
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.
2. The Monetary Policy outlook for the RBNZ
The RBNZ delivered a very hawkish tils during their July policy meeting, by announcing that they will be completely stopping purchases under their LSAP program from the 23rd of July. Going into the meeting markets were already expecting the bank to cut rates as soon as November, which meant that tapering QE was a necessary prerequisite for the bank to signal that they are indeed planning to hike rates this year. However, after the hawkish tilt, and especially after the solid beat in Q2 CPI on Friday, OIS markets are pricing in about a 70% chance of a hike as soon as the August meeting. Even though the meeting and beat in CPI is of course positive and suggests tighter policy, the bank called July’s decision a ‘least regrets’ policy and added that ‘some monetary stimulus remains necessary’ to reach their goals. This does not sound like a bank that is very excited to hike rates this month or even hike three times before year end as some participants expect. Thus, there is a chance that markets might have been a bit too aggressive in their expectations and could be setting up for a disappointment. However, whether that is the case or not, the tilt from the bank and the beat in CPI is expected to be a supportive factor for the NZD going into the August policy meeting.
3. The country’s economic and health developments
A solid Q2 Jobs report has seen OIS markets pricing in close to a 100% chance of a hike at the RBNZ’s August meeting, with more participants now seeing a high probability of 3 hikes from the bank before year-end and the possibility of a fourth in Q1 of 2022. That would place the RBNZ miles ahead of its peers in terms of their policy stance and the divergence should continue to provide a favourable environment for the NZD, which in our opinion has not been pricing in its fundamental realities as much as the bond market has.
4. CFTC Analysis
It seems the challenges facing China as well as a few jittery risk sentiment days has seen market participants reduce positioning in the NZD (- 1746) with the net-positioning still close to neutral. This doesn’t really reflect the current fundamental outlook for the NZD with a rate hike fully expected for later this month. One can argue that the NZD has been trading more muted with a lot of the positive potentially already reflected in the price, but that would be quite surprising given that the NZD haven’t been trading as strong as it’s fundamentals suggest. That means with a neutral positioning there should be further scope for upside, but risk sentiment will of course be important to watch as always.
JPY
FUNDAMENTAL BIAS: BEARISH
1. Safe-haven status and overall risk outlook
As a safe-haven currency, the market's risk outlook is the primary driver of JPY. Economic data rarely proves market moving; and although monetary policy expectations can prove highly market-moving in the short-term, safe-haven flows are typically the more dominant factor. The market's overall risk tone has improved considerably following the pandemic with good news about successful vaccinations, and ongoing monetary and fiscal policy support paved the way for markets to expect a robust global economic recovery. Of course, there remains many uncertainties and many countries are continuing to fight virus waves, but as a whole the outlook has kept on improving over the past couple of months, which would expect safe-haven demand to diminish and result in a bearish outlook for the JPY.
2. Low-yielding currency with inverse correlation to US10Y
As a low yielding currency, the JPY usually shares an inverse correlation to strong moves in yield differentials, more specifically in strong moves in US10Y . However, like most correlations, the strength of the inverse correlation between the JPY and US10Y is not perfect and will ebb and flow dependent on the type of market environment from a risk and cycle point of view. In the past week we saw a perfect environment for downside in the JPY versus the USD when better-than-expected ISM Services data and less dovish comments from Fed’s Clarida gave US10Y a lift alongside the US Dollar , which was enough for the USDJPY to break back above 109.00 and 109.50. Then on Friday the good US jobs report saw yet another environment for US10Y and the Dollar to push higher, creating yet another perfect environment for USDJPY to push higher, and the pair managed to reclaim the 110.00 and break above key technical trend support. Given the positive backdrop from last week, the pair should continue to enjoy upside, with the biggest risk being any major risk off moves which might see downside in yields and upside in the JPY from safe haven flows.
3. CFTC Analysis
The JPY remains the biggest net short among the majors and didn’t manage to take any real advantage of the drop lower in US10Y . Given the wash out in treasury positions and the move towards 1.12% in US10Y over the past few weeks the JPY has not really taken the bait to appreciate as one would have thought. Thus, even though the currency remains oversold from a positioning point of view, it does show that there is some possible asymmetry in long USDJPY right now as a move lower in yields have not negatively affected the pair as one would have expected.
After the most recent Fed rhetoric and the solid US data we’ve have finally seen some promising moves higher in US10Y in line with the med- term outlook, and with a very light data calendar in the week ahead a further move higher in the USD and US10Y could provide a good backdrop for a further grind higher in the USDJPY , with big risk off flows the biggest risk to that view as it should be supportive of the safe haven JPY.
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.
2. The Monetary Policy outlook for the RBNZ
The RBNZ delivered a very hawkish tils during their July policy meeting, by announcing that they will be completely stopping purchases under their LSAP program from the 23rd of July. Going into the meeting markets were already expecting the bank to cut rates as soon as November, which meant that tapering QE was a necessary prerequisite for the bank to signal that they are indeed planning to hike rates this year. However, after the hawkish tilt, and especially after the solid beat in Q2 CPI on Friday, OIS markets are pricing in about a 70% chance of a hike as soon as the August meeting. Even though the meeting and beat in CPI is of course positive and suggests tighter policy, the bank called July’s decision a ‘least regrets’ policy and added that ‘some monetary stimulus remains necessary’ to reach their goals. This does not sound like a bank that is very excited to hike rates this month or even hike three times before year end as some participants expect. Thus, there is a chance that markets might have been a bit too aggressive in their expectations and could be setting up for a disappointment. However, whether that is the case or not, the tilt from the bank and the beat in CPI is expected to be a supportive factor for the NZD going into the August policy meeting.
3. The country’s economic and health developments
A solid Q2 Jobs report has seen OIS markets pricing in close to a 100% chance of a hike at the RBNZ’s August meeting, with more participants now seeing a high probability of 3 hikes from the bank before year-end and the possibility of a fourth in Q1 of 2022. That would place the RBNZ miles ahead of its peers in terms of their policy stance and the divergence should continue to provide a favourable environment for the NZD, which in our opinion has not been pricing in its fundamental realities as much as the bond market has.
4. CFTC Analysis
It seems the challenges facing China as well as a few jittery risk sentiment days has seen market participants reduce positioning in the NZD (- 1746) with the net-positioning still close to neutral. This doesn’t really reflect the current fundamental outlook for the NZD with a rate hike fully expected for later this month. One can argue that the NZD has been trading more muted with a lot of the positive potentially already reflected in the price, but that would be quite surprising given that the NZD haven’t been trading as strong as it’s fundamentals suggest. That means with a neutral positioning there should be further scope for upside, but risk sentiment will of course be important to watch as always.
JPY
FUNDAMENTAL BIAS: BEARISH
1. Safe-haven status and overall risk outlook
As a safe-haven currency, the market's risk outlook is the primary driver of JPY. Economic data rarely proves market moving; and although monetary policy expectations can prove highly market-moving in the short-term, safe-haven flows are typically the more dominant factor. The market's overall risk tone has improved considerably following the pandemic with good news about successful vaccinations, and ongoing monetary and fiscal policy support paved the way for markets to expect a robust global economic recovery. Of course, there remains many uncertainties and many countries are continuing to fight virus waves, but as a whole the outlook has kept on improving over the past couple of months, which would expect safe-haven demand to diminish and result in a bearish outlook for the JPY.
2. Low-yielding currency with inverse correlation to US10Y
As a low yielding currency, the JPY usually shares an inverse correlation to strong moves in yield differentials, more specifically in strong moves in US10Y . However, like most correlations, the strength of the inverse correlation between the JPY and US10Y is not perfect and will ebb and flow dependent on the type of market environment from a risk and cycle point of view. In the past week we saw a perfect environment for downside in the JPY versus the USD when better-than-expected ISM Services data and less dovish comments from Fed’s Clarida gave US10Y a lift alongside the US Dollar , which was enough for the USDJPY to break back above 109.00 and 109.50. Then on Friday the good US jobs report saw yet another environment for US10Y and the Dollar to push higher, creating yet another perfect environment for USDJPY to push higher, and the pair managed to reclaim the 110.00 and break above key technical trend support. Given the positive backdrop from last week, the pair should continue to enjoy upside, with the biggest risk being any major risk off moves which might see downside in yields and upside in the JPY from safe haven flows.
3. CFTC Analysis
The JPY remains the biggest net short among the majors and didn’t manage to take any real advantage of the drop lower in US10Y . Given the wash out in treasury positions and the move towards 1.12% in US10Y over the past few weeks the JPY has not really taken the bait to appreciate as one would have thought. Thus, even though the currency remains oversold from a positioning point of view, it does show that there is some possible asymmetry in long USDJPY right now as a move lower in yields have not negatively affected the pair as one would have expected.
After the most recent Fed rhetoric and the solid US data we’ve have finally seen some promising moves higher in US10Y in line with the med- term outlook, and with a very light data calendar in the week ahead a further move higher in the USD and US10Y could provide a good backdrop for a further grind higher in the USDJPY , with big risk off flows the biggest risk to that view as it should be supportive of the safe haven JPY.
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