Buy the New Zealand Dollar on Weakness

Buy the New Zealand Dollar on Weakness

14 April 2016, 14:14
Vasilii Apostolidi

Strategic modelling at Westpac has confirmed the New Zealand dollar is likely to appreciate further.

The New Zealand dollar should be bought on weakness argue analysts at Westpac Global Strategy Group.

In a note to clients analyst Richard Franulovich confirms that their ‘High Conviction Trades’ model is advocating for further New Zealand dollar strength and traders should look to buy the currency on any weakness.

“Our process guides us into a fresh NZD long on dips. NZD/USD has again broken above a six-month old contracting range (the previous break on 30 March was unsustained), and as long as it remains above 0.6875 we will adopt a bullish week-ahead bias,” says Franulovich.

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There's no NZ data of note until the Q1 CPI release on 18 April which suggests the New Zealand dollar will find itself at the mercy of firming risk appetite and a challenging USD outlook.

Westpac do acknowledge that a hefty -40bp in RBNZ easing is likely to take place in 2016 which could hamper strength at some point.

The New Zealand to US dollar exchange rate is forecast to target 0.7175.

“We look to buy NZD at 0.6850, stop 0.6750,” says Franulovich.

 The US dollar is expected to face further challenges with Q1 growth described as being "a write off" - the Atlanta Fed's latest nowcast at 0.3%, a mild improvement on the previous month's 0.1%. 

It is suggested the US Federal Reserve will want to see at least 2-3 months of stronger data to be sure residual seasonality depressed Q1 growth.

That calls into question a June 15 Fed hike, which was always looking dubious given proximity of the June 23 UK EU referendum. Until markets believe the Fed is once again turning positive on interest rates the dollar is unlikely to find traction. (Capital Economics however warn that markets are being too pessimistic on the Greenback's chances going forward).

Stability in China is arguably also a challenge to the USD's outlook as Westpac believe policy there forms traction another challenge to the USD, via China's impact on commodity prices and EM capital flow trends.

About the Model

Westpac’s "High Conviction Trades" model blends the long/short/neutral recommendations from three of the bank’s research streams:

The G10 FX model (quantitative analysis)

The ForeX focus (macro analysis)

Technical analysis

The aim is to underscore the team of analyst’s highest conviction ideas.

“We use simple and transparent rules to generate trading positions: when all three inputs on a currency are aligned, long or short, our conviction levels are high and we execute a position at market; when two of three inputs are aligned we leave orders, an approach that is more compatible with slightly more cautious conviction levels; and lastly when our inputs produce a net neutral bias we stand aside,” says Franulovich.

Other Calls: USD/CAD and GBP/USD in Focus

We have already published the view that the pound is to be sold against the US dollar on any strength; this being the strongest signal being given by Westpac's model.

The bank's stance on the USD/CAD has shifted 180 degrees.

What had been a buy on dips stance in USD/CAD shifted with the model remaining upbeat but macro and technical views have turned much more negative.

USD/CAD momentum remains decisively lower, the break of 1.2850 a critical technical threshold that should unlock further losses.

Upgraded BoC growth projections this week thanks to the Trudeau fiscal stimulus and a strong Jan GDP (+0.6%) should add yet more impetus to USD/CAD weakness.

The BoC should still deliver a neutral signal on policy but growth could be upgraded from 1.4% for 2016 to around 1.8% while the 2.4% forecast for 2007 could easily be lifted to 2.8%.

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