Goldman Sachs: NZD & NOK: Diversifying Our G10 Commodity FX Basket

Goldman Sachs note that they are "adding NZD and NOK to our existing basket of USD shorts vs AUD and CAD (opened October 9; EUR removed from basket Oct 31). The sharp rise in global bond yields over the past week may elicit dovish responses from certain central banks. Without policy rate cuts there are limits to how much any steps will affect currency markets, but "verbal intervention" and/or tweaks to QE timelines could prove a temporary headwind to certain crosses. We are therefore adding NZD and NOK to our equally-weighted USD short basket. The RBNZ and Norges Bank seem least likely to respond to the rate sell-off with concrete policy steps, as both central banks were edging in a hawkish direction ahead of the move. Inflation is close to target in New Zealand, and the RBNZ has reintroduced house price considerations into its policy framework. Inflation in Norway is also comparatively high, and Norges Bank has pulled forward its own liftoff expectation to mid-2022 (partly for these reasons we are already long NOK/SEK). We revise our total target on the basket trade to 111 (from 108) and stop to 104 (from 103); currently trading at 106."