While the Fed is increasing the uncertainty, not excluding the QE tapering even against the backdrop of a slowing economy, the RBNZ is as open to the public as possible. Its intention to raise rates gives an advantage to the Kiwi bulls. Let us discuss the Forex outlook and make up a trading plan for NZDUSD, EURNZD, AUDNZD and NZDJPY.
Monthly New Zealand dollar fundamental forecast
Don’t know what to do? Buy the NZD! The strategy started making money regularly after the RBNZ unexpectedly refused to raise rates at its August meeting, introducing a nationwide lockdown. The very next day, Adrian Orr asked the parliament to apologize his cowardice, and the Kiwi began to grow rapidly. Money markets expect the RBNZ to do in October what it did not do two months earlier: raise the cash rate by 25 bps. A surprise in the form of a 50 bps increase is also possible. Rumors of an imminent monetary restriction allow the Kiwi to attack its opponents, even under unfavorable external conditions.
Should we be surprised at the nervousness of financial markets if, in the context of the spread of the Delta and the slowdown in world economic growth, the central banks, led by the Fed, are still going to normalize monetary policy? Fearing that the Fed, despite weak data on nonfarm payroll employment and inflation, will announce the QE tapering on September 22 is one reason for the correction of US stock indices. The S&P 500 closed in the red in five of the previous six trading sessions, and Treasury yields fell in response to the slowdown in US inflation. The stock market is signaling a deterioration in global risk appetite, which is perceived as a headwind for a kiwi.
Dynamics of inflation and Treasury yields
The yield on 10-year New Zealand bonds for the first time since April 2019 exceeded the 2% mark and is the highest among the G10. The indicator is growing on expectations of RBNZ’s monetary restriction and New Zealand’s GDP acceleration by 16.3% YoY in the second quarter. Risky assets, as a rule, are sold off, during the S&P 500 correction, but the kiwi’s resilience is commendable.
Perhaps buying NZDUSD ahead of the FOMC meeting, with a possible hawkish surprise, is not a good idea. However, investors should take a closer look at the NZD longs against other currencies. In particular, Nordea believes that outbreaks of COVID-19 are seasonal and recommends buying the Kiwi and the Aussie against the euro due to the potential deterioration of the epidemiological situation in Europe in the fourth quarter.
Dynamics of EURAUD and the ratio of COVID-19 cases
Source: Nordea Markets
In such conditions, it makes sense to hold EURNZD shorts, formed at the levels of 0.685 and 0.675 in the direction of level 0.651.
The best strategy I have voiced in 2021 is selling AUDNZD. Despite the fact that the target of 1.0327, set in August, has already been reached, a downtrend is likely to develop amid RBNZ’s reluctance to raise rates earlier than 2024. The next selling targets are 1.023 and 1.012.
The S&P 500 correction and falling Treasury yields allowed the NZDJPY bears to strengthen, but as soon as debt rates resume growth, the pair will return to an uptrend. Use correction to form longs with a target at 79.5.
Price chart of NZDUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.