NZD: Political risk is well accounted for - ANZ

Most of the ‘gloomy’ outlook in New Zealand is already priced into the NZD and While a near-term wobble in growth is possible, domestic structural fundamentals remain supportive and the global environment should provide a boost, according to analysts at ANZ.

Key Quotes

“The NZD has depreciated abruptly over the past couple of weeks amid rising policy uncertainty. However, we think the NZD has likely bottomed.”

“Our Independent Driver Model1 shows the NZD residual component has turned negative for the first time since January 2016 and has surpassed the ’99- election low in the series. This suggests that lot of the political uncertainty has been already priced into the currency and, at current levels, the NZD is now likely to be marginally less sensitive to bad news.”

“Further, we believe the negativity associated with NZ’s recent election has had its greatest impact on the NZD. An analysis of the residuals in the Independent Driver Model of key policy events for other G10 currencies suggests the impact of the NZ election has been large compared to recent history and some stabilisation is likely.”

“Growth prospects, however, remain respectable on a medium-term basis. The terms of trade is near historic highs, household income growth is solid and fiscal policy is set to turn far more expansionary. Inflation risks are looking a little more upwardly skewed, which should eventually see the RBNZ respond. Ultimately, this positive economic outlook should provide a floor for the NZD.”

“With global growth remaining strong and volatility close to extreme lows, risk appetite should provide some further momentum to the NZD, at least in the near term.”

“As markets re-calibrate NZ’s policy risk, we see potential for near-term upside in the NZD, and we recommend buying it against the euro.”

“With the ECB’s ‘downsizing’ announcement now out of the way and any rate hike unlikely to come before mid-2019, we see further under-performance in the period ahead.”

“Further, while momentum in the euro area remains strong, policy uncertainty is likely to resurface soon – with the prospect of Italian election in Q1 2018 looming for the currency, along with the ongoing uncertainty around a coalition in Germany and the election in Catalonia rumbling in the background.”

“Bottom Line

We recommend selling EUR/NZD at 1.6835 with a target of 1.6227. We will reconsider the trade above the recent high at 1.7216.”