NZD exposed to further downside risks this week – Barclays

The Barclays Research Team offer their outlook on the NZD trade this week, in the wake of the FOMC and RBNZ monetary policy decisions, as the monetary policy divergence will remain in play.

Key Quotes:

“We recommend selling NZDUSD, target 0.7130, stop-loss at 0.7315 while implying a reward-to-risk ratio of 2:1 (spot reference: 0.7252).

In stark contrast to the Fed, the RBNZ is likely to strike a dovish tone in its March Statement

Following the February MPS meeting Assistant Governor and Chief Economist, John McDermott noted in an interview with Bloomberg that while the central bank's stance was neutral with "a significant probability that the next rate move could be an increase sometime in the future" he added -there's also a substantial probability that the next move could actually be a cut. If we saw big moves in inflation expectations. The market should expect the bank to act."

NZD may experience further downward pressure if a more hawkish Fed creates an environment of higher US interest rates and weaker equities, given that its high sensitivity to these variables will likely be exacerbated by a lack of real rate advantage. FX overvaluation and a highly responsive government bond market. 

This trade recommendation is valid from the Wellington open Monday to the New York close Friday.”