NZD/CHF: Time for buyers to step in?

One of the key skills in trading FX markets is to pair strong currencies against weak currencies. A current example of this can be found in trading the New Zealand Dollar against the Swiss Franc.

The strong: The New Zealand dollar

Running up into the RBNZ meeting this month the expectations were that the RBNZ was going to hike rates. Unemployment was at a low (4.0%), inflation high (3.3% y/y), tapering had stopped on July 23 and the largest investment banks in the regions were predicting three hikes before year-end. However, just before the meeting, short term sentiment changed. A single case of COVID-19 was found and this sent the nation into an entire lockdown. Since then the cases have been steadily rising and we are not yet entirely sure how many more cases are to come. The previous peak number of cases was 89 per day. On Wednesday am there were 63.

RBNZ not too worried about cases rising

After the RBNZ held rates due to the Covid outbreak Governor Orr said that COVID cases alone will not stop a rate hike and needs to move on policy and cannot wait for uncertainty to lift. This positive sentiment was echoed on Tuesday this week (Aug 24) when RBNZ’s Hawkesby said this week that the RBNZ considered raising the official cash rate by 50 bps at the last meeting. This was above the estimates of one rate hike and would have been a bullish surprise. The RBNZ is not showing major signs of concerns over rising COVID-19 cases and the medium-term outlook for the NZD seems firm. The RBNZ’s approach to covid-19 is ‘been there, done that’ and we know that lockdowns work.

As long as COVID sticks to that script - annoying, but manageable, then the NZDCHF pair has plenty of room to move higher. The RBNZ is projecting one rate hike this year and four the next.

The weak: The swiss franc

The SNB has the lowest interest rates in the world at -0.75% as they try to discourage inflows into the CHF. As a safe haven currency CHF, alongside the JPY, often sees strength in risk-off markets. The SNB actively engage in the markets in order to discourage its strength. With that being said, the SNB are not anywhere near hiking. So, relative to the NZD, it should remain weak.

The chart

Entry NZDCHF at market with stops below.

The main risks to this outlook are as follows

• If the COVID cases mean lockdowns go on and on in New Zealand that could change the RBNZ’s confident outlooks.

• Any heavy risk-off trading would see the CHF gain in value.

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