NZDUSD: 0.70-0.73 range is likely to hold – BNZ
Jason Wong, Currency Strategist at BNZ, suggests that this week could well be deadly quiet until the Fed’s Jackson Hole symposium, which kicks off on Friday NZ time, with particular focus on Fed Chair Yellen’s speech.
“We won’t know the timing of speech until later in the week, but it is likely to be after the NZ close on Friday.
The outlook for US monetary policy has been a key driving force for the NZD this year and it remains the key factor driving its likely path from here as well. The Fed’s messaging last week was that tighter US monetary policy was still on the agenda. Every meeting should be considered ‘live’ and the market might be underestimating the scope for higher interest rates over the coming year or so. Over the weekend, Fed Vice-Chairman Fischer added his two cents worth. He didn’t give any explicit comment on the timing of rate hikes but he commented that “we are close to our targets”.
While Fed speakers are keen to keep near-term policy options open, there has also been an underlying message that the world has changed and the neutral interest rate is now lower than previously thought. Thus, a much more muted tightening cycle could well do the trick in containing any inflationary pressure.
Thus, in reading Fed Speakers, one must be careful to differentiate between the short-term outlook and the long-term outlook. This is where it gets tricky in thinking about the outlook for the USD. While a December (or earlier) rate hike would be USD-positive as it is not fully priced, if a very muted tightening path thereafter is likely to ensue, then expectations for a stronger USD over the next few years might need to be re-evaluated.
While we’re keeping a close eye on US monetary policy, it’s hard to ignore the recent more positive dairy price trend in play. NZ dairy prices have strengthened over the past month – up over 40% for the NZX 2nd dairy futures contract – on the back of improved supply/demand dynamics. This is a fresh support factor for the NZD. The balance of risk is for further upside in dairy prices, as they continue to recover from an unsustainably low level. Also worth noting is that a strong NZD in the context of stronger terms of trade is less of a concern for the RBNZ. It certainly reduces the perceived ‘over-valuation’ of the NZD if a fundamental economic factor can explain the strength.
In a quiet week, the USD 0.70-0.73 range that the NZD has found itself in for much of the last couple of months is likely to hold. The top of the range has proven a tough nut to crack and represents an area of technical resistance. A dovish Yellen on Friday night provides the best chance to break out of that range to the topside. A hawkish Yellen would support our central view of one Fed hike later this year (December) and put the NZD on the road towards our year-end target of USD 0.70.
On the crosses, there’s little economic data released to get the market excited, so recent ranges should hold.”