NZD/JPY Short (Macro) Medium Term
“1. Short NZDJPY looks attractive from a technical perspective. NZDJPY is trading near the top of its recent range and a double top has been confirmed just below 84.00.
2. The NZD is the G10 currency most vulnerable to a correction lower in global equity markets. NZDUSD’s beta to MSCI World is currently 0.83 according to our short-term fair value model BNP Paribas STEER™. This suggests that a 5% correction lower in global equities would reduce NZDUSD’s fair value by 4.1%.
3. Market pricing for the Reserve Bank of New Zealand (RBNZ) could be vulnerable to unwinding. The market currently prices around 35bp of tightening by the end of this year. However, we note that at its last meeting the RBNZ reiterated that New Zealand’s trade weighted index (TWI) needed to decline, and since then it has strengthened further. We therefore expect the central bank to be cautious in prompting the market to price in more tightening at its 9 February meeting, as this would further strengthen New Zealand’s TWI.
4. Long NZD exposure has risen recently, flipping from a negative score to to a positive score of +10 (on our scale of -/+ 50), according to BNP Paribas FX Positioning Analysis. Relative NZDJPY positioning has reached a score of +30, the largest long since July 2014.
5. Milk prices – there were sharp rises in milk prices through 2016, which prompted considerable NZD strengthening. However, milk prices appear to have topped out and, if the recent milk price weakness is confirmed at next week’s Fonterra auction (scheduled for 7 February), the NZD could be vulnerable to a downward correction,” BNPP says as a rationale behind this call.