NZD: Wary of chasing around current levels - ANZ

Analysts at ANZ remain wary of chasing the NZD around current levels, despite the impetus being provided from the terms of trade, economic growth, and sound policy direction – with the latter increasingly a differentiator in a resentment-vote-driven world.

Key Quotes

“There are four key reasons we prefer to hold a more neutral position:

• Market pricing is too detached from the FOMC’s views. The Fed’s ‘five hikes by the end of 2018’ is too many, but the market’s ‘two’ is too light. That gap needs to be closed from both sides.
• China, commodities and the AUD all look vulnerable.
• A second episode of political backlash in the UK in a year is a reminder that the anger /resentment vote is alive and well. Capitalism as we know it is coming to an end. The spoils have accrued too much to capital and too little to labour; it has caused inequality and arguably contributed to secular stagnation themes. What the modified version of capitalism (some sort of social justice version) looks like has yet to be negotiated.  Neither society nor politicians really know. What we do know is that policy uncertainty is high and sentiment fractured. When policy uncertainty is high, the time-value option for firms is in waiting to put cash to work. This will manifest in softening economic data and volatility, with negative implications for the commodity bloc.
• We’re cognisant New Zealand has an election around the corner. We’re not expecting anger-vote fireworks, but it doesn’t take much of a shift to deliver uncertainty in an MMP environment.”

“The NZD/AUD is consolidating around 0.95-0.96 for a test higher still. While moving into overvalued territory, the rubber band does not yet look taut.  Business cycle signals (construction, unemployment, growth, commodity prices) are more in New Zealand’s favour and this is accentuated by a better microeconomic policy platform.”